Can a supervillain share coffee in the company cafeteria with an ogre?
Comcast's answer seems to be: Yes.
The $148 billion broadcaster is reportedly mulling a $3 billion-plus offer for DreamWorks Animation SKG. To put it in cartoon terms, the cable giant that oversees the Despicable Me films starring the supervillain Gru might be buying the studio that bought you Shrek. Spoiler: everyone's hearts are melted by love in the end. In the films, that is.
Let's see if that will happen in real life. Financially, this would be an easy transaction for Comcast. The challenge lies in squeezing a better product out of the creatives getting placed under new management.
DreamWorks has been the subject of bid talks with various suitors in recent years and looks like it could benefit from finding a strong parent. It recently cut movie output to just two a year.
Strategically, it has been expanding into television production as a way of countering swings in movie revenue, which can be lumpier than a forest-dwelling giant. As film, television, merchandising and related businesses like theme parks converge, the logic of DreamWorks being swallowed by a diversified, financially strong media company is plain to see.
A bid at $3.1 billion would represent a premium of 30 percent for DreamWorks' equity and an all-in cost of about $3.3 billion including assumed debt, or 29 times forward Ebitda. This is a unique business; comparisons with other media transactions are not terribly useful.
But Comcast's beancounters could probably get comfortable with the $705 million premium on the basis that ripping out duplicated central costs would help pay for it. Either way, a deal would be child's play: Comcast's balance sheet is in good shape. The group spent some $6.75 billion on share buybacks in 2015 and is looking to do a further $5 billion this year.
The hard part will be delivering better movies by moving DreamWorks into the Comcast stable. The success of the "Kung Fu Panda" franchise shows DreamWorks has plenty of fight, but there are also misses stacking up from releases such as "Turbo" and "Mr. Peabody."
Comcast would keep separate the DreamWorks brand and Illumination Entertainment, the animation division in Comcast's Universal Studios business, reported the Wall Street Journal, which broke the news about the possible acquisition.
That sounds wise. Acquired creative businesses can function well inside big corporations when allowed to retain a degree of autonomy, while still getting the benefit of the parent's scale economies in marketing, distribution and mundane operating expenditure. That insight is, for example, part of the success of WPP, the global ad group that looks like a federation of agency acquisitions.
The other big question is how to find a suitable role in Comcast for Jeffrey Katzenberg, DreamWorks' founder and a former chairman of Walt Disney and an all-around Hollywood giant. That adds to the uncertainty about whether DreamWorks can find the right working dynamic within a big broadcaster.
DreamWorks would be a small deal, but the people and creative issues belie its tiny size. Still, the transaction would be a more imaginative idea for Comcast than just spending another $5 billion buying back its own stock.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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