Shrek 2's maker is going public

DreamWorks Animation plans $650 million IPO in challenge to Disney

Katzenberg to be CEO

July 22, 2004|By BLOOMBERG NEWS

NEW YORK - Jeffrey Katzenberg plans to take the animation unit of DreamWorks SKG public in a $650 million initial public offering that will allow the studio to double its film production and increase its challenge to Walt Disney Co.

Katzenberg, 53, who helped found DreamWorks in 1994 after he reportedly was passed over for president of the Walt Disney Co., will become chief executive and control the new company, DreamWorks Animation Inc.

The sale, the biggest initial public offering of an entertainment company in nine years, allows DreamWorks to capitalize on its strongest unit after box-office failures with its live-action movies and the sale of its music unit.

DreamWorks Animation produced Shrek 2, the highest-grossing animated film in the United States. But despite its recent success, DreamWorks Animation has made money in just two of the past five years, according to a regulatory filing.

"We know they can produce good movies," said David Baker, a fund manager at North American Management Co. in Boston, which manages $550 million. "We don't know if they can produce them profitably."

Katzenberg will get the chance to run a public company for the first time and increase pressure on Disney, which is losing its film distribution agreement with Pixar Animation Studios next year and stumbled with animated films such as Treasure Planet.

DreamWorks Animation will use $175 million from the IPO to invest in possible acquisitions and joint ventures, according to a Securities and Exchange Commission filing.

The sale will also allow DreamWorks Animation to repay the debt it is assuming by separating from DreamWorks SKG, the privately held movie studio founded by filmmaker Steven Spielberg, music executive David Geffen and Katzenberg.

DreamWorks Animation, based in Glendale, Calif., didn't provide a price range for the shares it will sell or the total number of shares. The company's total market value could not be determined through the filing.

The stock sale may have been prompted by Microsoft Corp. co-founder Paul G. Allen, who initially invested $500 million in DreamWorks in 1995, said Harold L. Vogel, an analyst with Vogel Capital Inc. in New York.

DreamWorks must find a way to pay back Allen starting next year, The New York Times reported in May, quoting unidentified people familiar with DreamWorks.

DreamWorks Animation is creating a third class of shares, Class C, for Vulcan Capital, Allen's investment firm, which allows Allen to elect one director.

DreamWorks Animation's Class A shares will be offered to the public and Class B shares will be held by DreamWorks executives, including Katzenberg and Geffen, and by Allen, the company said.

Geffen will be on the board of DreamWorks Animation, which will also include former PepsiCo Inc. CEO Roger A. Enrico, Allen and Starbucks Corp. founder Howard D. Schultz. Spielberg was not named as a director.

DreamWorks Animation said its success has come through computer-generated animation films and that it plans to release two such films each year. That production rate will exceed any of its competitors, it said.

The animation unit has released eight films. These include three computer-generated movies, Antz, Shrek and Shrek 2, that have grossed $782 million at the domestic box office. The company's five other films have generated $359 million at the domestic box office.

Shrek 2 has taken in $425 million in ticket sales since it opened May 19. But before its release, the unit posted a net loss of $25.9 million in the first quarter, on revenue of $40.8 million, up from $11.9 million a year earlier. As of March 31, DreamWorks Animation had $465.3 million in debt, including $380.1 million allocated by DreamWorks SKG.

"DreamWorks isn't an automatic growth story," said David Menlow, president of the research firm IPOFinancial.com. "Wall Street and investors need to really dig into these numbers and not just look at it as a movie industry magnet."

The company said its financial results for the rest of this year and all of next year will depend on the success of Shark Tale, an animated film about a shark involved in organized crime. It features the voices of actors Robert DeNiro, Will Smith and Renee Zellweger and will be released Oct. 1.

The home-video release and TV broadcast of Shrek 2 will also have an impact on the company's finances, it said.

In recent years Disney's animated unit has failed to produce box office success. Its most recent effort, Home on the Range, has earned $49.8 million at U.S. and Canadian theaters since its release April 2.

Michael D. Eisner, Disney's CEO, said in May that the studio had taken a "small" write-down on the film during the first quarter. The 2002 release Treasure Planet brought in $38.2 million. Disney's next animated film, The Incredibles, produced by Pixar Animation Studios, is scheduled to open Nov. 5.

Katzenberg had been a protege of Eisner at Paramount's film and television operations beginning in 1975. He came to Disney with Eisner in 1984, then left in 1994 saying Eisner broke his word by not naming him president after the death of Frank G. Wells, the No. 2 Disney official, according to Kim Masters' book, Keys to the Kingdom: The Rise of Michael Eisner and the Fall of Everybody Else.

So far this year, U.S. IPOs have raised $19.8 billion, already exceeding last year's total of almost $14 billion.

The Metro-Goldwyn-Mayer Inc. film studio sold $180 million in shares to the public in November 1997 and Pixar raised $132 million in 1995.

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