When Comcast's (NASDAQ:CMCSA) NBCUniversal announced its acquisition of DreamWorks Animation (NASDAQ:DWA) in April, the deal was immediately reminiscent of Disney's purchases of Pixar, Marvel, and Lucasfilm. NBCUniversal's press release specifically mentioned DreamWorks' "deep library of intellectual property" that it can use in its parks and consumer goods segments. That's a move straight out of Disney's playbook.
But DreamWorks offers Comcast's NBCUniversal more than just a new portfolio of characters to integrate into its parks, toys, and TV shows. Here are three more reasons Comcast bought DreamWorks for $3.8 billion.
1. Lots of synergies
There are two areas in particular that CFO Mike Cavanagh pointed to for cost savings when he discussed the acquisition with J.P. Morgan analyst Phil Cusick at its annual Technology, Media, and Telecom conference. He sees potential to cut costs in distribution and overhead.
DreamWorks currently has distribution agreements with Fox and Paramount where it pays each a percentage of revenue. As a film company making just two features per year, it doesn't make sense for DreamWorks to have its own distribution arm. Cavanagh says DreamWorks is paying out around $75 million in distribution costs each year. When those agreements expire in a couple years, NBCUniversal will bring distribution in house, saving the company money.
DreamWorks also spent $376 million on selling, general, and administrative expenses last year, more than 40% of revenue. DreamWorks' overhead is high due to the fact that it's only producing two movies per year. Cavanagh sees room to reduce that overhead percentage by combining workforces and reducing redundancies.
Additionally, there's opportunities for NBCUniversal to receive better box office splits than DreamWorks because it has more leverage with theaters as a larger filmmaker. Piper Jaffray's Stan Meyers sees the potential for $50 million extra in higher film splits, and another $50 million in savings from film budget expenses.
Combine all these synergies, and Comcast effectively bought DreamWorks for a single-digit EBITDA multiple, according to Cavanagh.
2. A way to enter the animated TV market
DreamWorks has already established a TV animation studio, something Universal has yet to do. Cavanagh sees that as an opportunity to leverage NBCUniversal's intellectual property to create new animated series. He gives the example of Jurassic Park, the latest installment of which generated $1.67 billion at the box office last year.
As I mentioned above, most saw the DreamWorks deal as an opportunity for NBCUniversal to gain access to DreamWorks' IP, but Cavanagh sees it going both ways. He sees NBCUniversal characters and series as the jumping off point for new original series from DreamWork's TV studio. Taking advantage of DreamWorks TV animation studio and its distribution agreement with Netflix could allow Comcast to get its franchises in front of a younger and wider audience. With Netflix as a built in buyer for those potential series, that's 81 million potential viewers.
Leveraging Universal's IP would be an excellent way for the company to create kids' animated series that adults will watch with their children. That's something DreamWorks has excelled at over the years in the box office and home entertainment market with movies like Shrek and How to Train Your Dragon.
3. More animated feature bandwidth
Universal's Illumination Entertainment already makes two films a year. Cavanagh says there's no room to organically increase Illumination's capacity, so the DreamWorks acquisition provides a way for Universal to do that.
Cavanagh notes that animated films carry better risk-reward characteristics compared to live-action films. "We've long wanted to tilt the business more in the direction of animated films at the margin and this gives us the capacity to do that," he told the audience.
Now, Universal will be able to put out four animated films a year -- two sequels and two new features. This strategy allows Universal to capitalize on its successes while finding new franchises to grow and become a larger part of its overall operations in TV and theme parks as well.
So, Comcast is getting a pretty good deal with DreamWorks, as it's acquiring much more than a library of intellectual property. It's getting a good price when you factor in the synergies and low capital intensity of the business, and it affords Universal the opportunity to expand in areas where it's lacking.