Can SoftBank Save DreamWorks?

Sep 30, 2014

After turning a $20 million investment into $71 billion in Alibaba, SoftBank’s Masayoshi Son is reportedly attempting to acquire DreamWorks Animation.   If this deal goes through, it will be added to Softbank’s collection of 1,300 stakes in companies varying from video streaming platforms to the mobile carrier Sprint. 

The deal for DreamWorks Animation would be valued at $3.4 billion, about $32 per share and a premium of 43% to the stock’s closing price on Friday.   At this stage, the deal is only in talks and speculation and has not been formally considered by senior executives. 

About a year and a half ago, DreamWorks CEO Katzenberg had previously looked for a buyer for the animation studio.  This may be due to the fact that DreamWorks is Hollywood’s smallest movie studio delivering only two or three films a year.  

DreamWorks attempted to solve this issue by partnering with Paramount in 2005, but then later left the partnership and signed a $1.5 billion deal to produce films with India’s Reliance ADA group.   Reliance provided $325 million of equity to fund the recreation of DreamWorks SKG into DreamWorks Studios, an independent entity. 

Current Financial Positions 

DreamWorks has reported two consecutive quarters of losses.  For the quarter that ended June 30, DreamWorks Animation lost $15.4 million compared with a profit of $22.3 million in the period a year earlier.  
Gross profit decreased about 56% from the period before from a value of $80.16 million to $34.745 million.  The same story goes with cash and cash equivalents that decreased by about 66% from the period before, but was made up for in intangible assets, net of accumulated amortization that increased by about 32%. 

 

Recent Acquisitions 

Earlier this year, DreamWorks entered into an Agreement and Plan of Merger and Reorganization with Big Frame Inc. As a result of the transaction, Big Frame became a wholly-owned subsidiary of DreamWorks. 

Big Frame is an online multi-channel network that connects advertisers with highly engaged audiences.   Additionally on May 20, 2014 the Company acquired certain rights, properties and other items pertaining to Felix the Cat and related characters pursuant to an Asset Purchase Agreement. 

The Company’s total cash consideration for these two transactions totaled approximately $33.6 million. As a result of these transactions and the preliminary purchase price allocations, the primary assets acquired were identifiable intangible assets of $22.1 million and resulting goodwill of $10.4 million.  

Struggling in Revenue 

 

For the three months ended June 30, 2014, revenues were $122.3 million, a decrease of $91.1 million, or 42.7%, as compared to $213.4 million for the three months ended June 30, 2013. 

Costs of revenues for the six months ended June 30, 2014 totaled $248.2 million, an increase of $29.4 million, or 13.4%, compared to $218.8 million for the six months ended June 30, 2013. Costs of revenues as a percentage of revenues were 92.1% for the six months ended June 30, 2014and 62.9% for the six months ended June 30, 2013. 

SoftBank Financial Position 

Year over year, Softbank has been able to grow revenues from $29.3 billion to $60.9 billion and has been able to reduce the percentage of sales devoted to income tax expense from 8.6% to 5.2%.  This was a key driver in increasing bottom line growth from $3.4 billion to $4.8 billion. 

Cash collection is a strong suit as the company is more effective than most in the industry.  As of the end of 2014, its uncollected receivables totaled $14.4 billion and as of Mar 31, 2014 cash and equivalents totaled $17.9 billion and total cash at $19.3 billion. 

 

SoftBank Incentive 

DreamWorks has a distribution partner in China called Oriental DreamWorks Holding Limited ("ODW") which is a related party where DreamWork’s featured films are now being distributed in China.  Since SoftBank has close ties with Alibaba, this may be offer a unique opportunity for SoftBank to further link Alibaba by tapping into an industry outside of China. As of June 30, 2014, the amount of outstanding receivables from ODW for distribution of our films was $3.6 million. 

As of June 30, 2014, DreamWorks remaining contribution commitments to ODW consists of the following: (i) $43.4 million in cash (which is expected to be funded over the next three years), (ii) two film projects developed by us, (iii) remaining delivery requirements under the licenses of technology and certain other intellectual property of ours and (iv) approximately $7.0 million in consulting and training services. 

Bottom Line 

This potential acquisition seems promising for DreamWorks as they have been struggling to keep up with the other major Hollywood studios in the past years.  Assuming their contracts within China and their distribution division in China continue to do well, this may be a good time for Softbank to acquire them at a lucrative time.  

This then could lead to something in the lines of Alibaba who recently just invested in a hotel information technology firm in hopes of expanding its Taobao travel business.  Softbank has a large enough balance sheet to take a hit in bottom line value, but with over 1,300 stakes in other companies, Softbank looks to generate top line growth while finding special opportunities to earn a positive return.   We currently rank DreamWorks as a Zacks Rank #3(hold).  Investors should keep an eye out for any M&A news to see if this deal actually follows through. 

Source: NASDAQ.com