CurrentOfferings.com Story:

DreamWorks Animation hits Street running

By Paul Bond, Hollywood Reporter, October 28, 2004

Impeccably timed to take full advantage of the success of "Shark Tale," the initial public offering of DreamWorks Animation SKG went off swimmingly Thursday, floating 38% higher in its first day of trading.

DreamWorks Animation sold 27% of itself to investors, offering 29 million shares for $28 apiece. While the windfall from 25 million of those shares went to company coffers to pay off debt and fund operations, 4 million of the shares were sold by insiders, most notably billionaire Paul Allen, an early investor in the DreamWorks SKG movie studio founded by Steven Spielberg, Jeffrey Katzenberg and David Geffen.

Allen, in fact, was one reason for DreamWorks Animation splitting from its parent and going public, as it gives him a more liquid investment that he might begin cashing in on.

"This is an opportunity for him to be rewarded for the amazing gamble that he took," said Katzenberg, who is CEO of the newly public company. Allen invested about $700 billion in DreamWorks beginning 10 years ago. "He's not the catalyst" for taking the animation unit public, Katzenberg said, "but he's one of the reasons I wanted to do this. I have a great sense of gratitude and debt to him. This is something he didn't push us to do, but he's very supportive of it."

By the end of trading Thursday, DreamWorks Animation was $10.75 higher at $38.75 on the New York Stock Exchange, where it trades under the symbol DWA. At the closing price, DreamWorks Animation sports a $4.09 billion market cap, less than the $4.57 billion of Pixar Animation Studios, the company DreamWorks Animation seems destined to be most often compared to.

"I have to say, it's kind of hard to be more pleased than we are," said Roger Enrico, the former Pepsico CEO who now chairs the DreamWorks Animation board of directors. "It feels pretty good on behalf of all the people at DreamWorks who have worked so hard to see the market give them this kind of reception."

Besides Enrico, Katzenberg, Geffen and Allen, other board members are Howard Schultz, Nathan Myhrvold and Lewis Coleman. Spielberg declined a seat on the board.

"When we started the company 10 years ago, he said one thing he would never do is be a director or officer of a public company," Katzenberg said of Spielberg. "He's a filmmaker, storyteller and artist, and that's just something he would never do. Having said that, he's one of the larger shareholders of DreamWorks Animation as well as being a creative consultant to the company, and he'll continue to make himself available to DreamWorks Animation and to myself."

DreamWorks Animation's forthcoming movies include two partnerships with Aardman Animation: A "Wallace & Gromit" feature film and "Flushed Away." Others are "Madagascar," starring Ben Stiller, Chris Rock and David Schwimmer; "Over the Hedge," starring Jim Carrey and Garry Shandling; and "Shrek 3," with Mike Myers, Eddie Murphy, Cameron Diaz and Antonio Banderas.

Although DreamWorks Animation shares traded strong out of the gate, some analysts were cautious Thursday. Fulcrum Global Partners initiated coverage with a "neutral" rating.

Positives cited by the firm include the continuing performance of "Shark Tale" and the upcoming release of the "Shrek 2" DVD. "Madagascar" is called a "swing factor," with the analyst report saying that "the film looks better than 'Shark Tale.' "

A key risk factor, though, is that Allen might begin selling more of his holdings -- which is better than 31 million shares -- six months from now, potentially depressing the stock price.

But, Katzenberg said, "We anticipate that Paul Allen will still remain one of our largest shareholders," even if he does choose to sell some shares next year.

The investment firm also derided DreamWorks Animation for the less-than-stellar performances of such traditionally animated films as "Spirit: Stallion of the Cimarron" and "The Road to El Dorado."

"Why did they greenlight the hand-drawn films that they did?" Fulcrum asked. "DWA made poor content/story decisions. How do they plan to prevent that going forward?"

But Katzenberg said that DreamWorks Animation exited the business of traditional animation in 2001.

"I think it's analogous to what happened when color came along and they stopped making black and white," he said. "The traditional form of 2-D animation is old-fashioned when compared with CG animation."

He added, though, that new 2-D techniques are interesting to him, like the animation being done with the upcoming "The SpongeBob SquarePants Movie."

"It will be a smash," predicted Katzenberg, though his company has no financial interest in the Paramount Pictures/Nickelodeon film. "I'm simply a fan who's looking forward to it."

Tom Taulli, operator of a Web site that tracks IPOs, called the Day 1 performance of DreamWorks Animation "spectacular" and predicted that "there may be more momentum to the upside" in the coming months, catalysts being the "Shrek 2" DVD and DreamWorks Animation's first earnings report as a public company.