DreamWorks Investor to Loosen Grip

Paul Allen plans to break up a partnership that controls the animation studio.

By Lorenza Muñoz
Times Staff Writer

October 12, 2006

Billionaire Paul Allen, who was instrumental in the launch of DreamWorks SKG, announced Wednesday that he was winding down his bumpy 12-year partnership with Hollywood's "dream team."

The Microsoft Corp. co-founder said he would dissolve a private partnership that controls DreamWorks Animation SKG Inc. and sell about half of his shares in a secondary offering that will probably take place next month.

Allen, DreamWorks' largest shareholder, invested a total of $707 million when Jeffrey Katzenberg, director Steven Spielberg and music mogul David Geffen formed their film studio in 1994.

Although self-described as the dream team when they formed the venture, the trio's ambitions were never fully realized. DreamWorks and its animation unit released their share of award winners such as "American Beauty" and crowd pleasers such as "Shrek," but its track record at the box office has been mixed overall.

Two years ago, DreamWorks Animation was split off from the privately held live-action studio and taken public. DreamWorks SKG was sold this year to Viacom Inc.'s Paramount Pictures.

Under an unusual provision in DreamWorks' ownership agreement, Allen had the right beginning in June to force the company to dissolve the partnership and sell to the public a portion — more than $300 million worth — of its shares.

On Wednesday, Allen demanded that the sale take place after the Nov. 3 release of DreamWorks' next film, "Flushed Away." A firm date has not been set.

A spokesman for Allen's company Vulcan Inc. declined to comment further.

"The company and the board have received Paul's request and will determine the appropriate timing for the offering," said Lew Coleman, president of DreamWorks Animation, in a statement. "We believe that the resolution of Holdco will be a positive for the company and its shareholders."

Allen's triggering of the secondary offering removes uncertainty that had made investors nervous, some analysts said Wednesday.

The possibility of such a sale has hurt DreamWorks' stock price, which is down more than 40% since its peak in 2004. Flooding the market with new shares could further weigh down the stock.

The Holdco partnership was created as a way to pay back the initial investors of DreamWorks SKG and was formed when DreamWorks Animation went public.

Holdco investors include Allen, Katzenberg, Spielberg, Geffen and another original investor, South Korean conglomerate Lee Entertainment. The partnership also includes Paramount Studios.

Although Holdco has a total of 50 million shares, only an estimated 14 million of them will be sold in the secondary offering. Most of those are held by Allen.

The sale will increase DreamWorks' publicly traded shares to about 52 million from 38 million.

Allen is expected to make about $220 million from his sale in the secondary offering. He received about $130 million in proceeds from the 2004 public offering of DreamWorks Animation. It is unclear what he made from the sale of DreamWorks SKG to Paramount.

After the sale, Allen will own at least $350 million worth of shares in DreamWorks Animation.

DreamWorks could authorize a share buyback program after the secondary offering to relieve pressure on the stock price, said Michael Savner, an analyst at Banc of America Securities. DreamWorks has more than $400 million in cash.

A DreamWorks spokesman would not confirm whether the company intended to buy back shares.

Shares of the Glendale-based animation company closed down 45 cents at $23.73 on Wednesday.

DreamWorks Animation has had a tough year. Its only release, "Over the Hedge," did not do as well as expected at the box office this spring.

Analysts do not expect the studio's upcoming animated feature, "Flushed Away," to do much business in part because of a glut of animated films in the market. The movie, about an uptown mouse that is accidentally flushed into London's sewage system, was co-produced by the British studio behind the "Wallace & Gromit" series, Aardman Animations.

"Wallace & Gromit: The Curse of the Were-Rabbit," released by DreamWorks a year ago, was critically acclaimed, winning an Academy Award for best animated feature. But DreamWorks wrote down the movie, which grossed only $56 million domestically. It did better abroad, bringing in $122 million, but that was significantly less than the company's previous titles, such as "Madagascar" and "Shark Tale."

Since DreamWorks' public offering, its stock price has been volatile, peaking at $41.98 in December 2004 before dropping to an all-time low of $20.30 in August.

The studio enjoyed huge success in 2004 from "Shrek 2," which grossed $902 million worldwide. But DreamWorks' batting average is no match for its rival, Walt Disney Co.'s Pixar Animation Studios.

DreamWorks will announce its third-quarter results Oct. 31, but analysts are not expecting a great quarter considering that the home video of "Over the Hedge" will not be released until next week and the studio has not had other releases in the period.

Given DreamWorks' track record, Richard Greenfield, an analyst at Pali Capital Inc., said he was not optimistic about the future.

"We think 'Flushed Away' will lose money. What value do you give to such a volatile company?" he said.