Over the past few trading days, shares of the two major independent Hollywood studios have moved up sharply. Dreamworks Animation (DWA) is up four straight days for a total of 13%. Lionsgate (LGF) is up 16% over two days. Both stocks were unusually strong on Tuesday on well above average volume.
Another studio in the news is MGM which is looking to refinance its balance sheet. MGM is privately owned by Comcast (CMCSA), Sony, Providence Equity, and TPG Group (formerly Texas Pacific Group).
I suspect what is going is speculation that these studios are going to be acquired. The Breaking News Blog at SNL Kagan reported that Liberty Media President and CEO Greg Maffei stated “We would look at a studio.” Maffei also said that studios were an attractive and relatively stable business, while stating that “one or two” could be for sale in the near future. It does not hurt studio values that the movie business is booming so far in 2009, with the North American box office up 15%.
Besides Liberty there could be other buyers. Time Warner (TWX) is looking for acquisitions and has a very good balance sheet post its separation from Time Warner Cable (TWC). I find it interesting that TWX was down more than 3% as DWA jumped 3% on Tuesday. DWA’s market cap of $2.3 billion is not massive and Warner Brothers could use the animated/family fare as it becomes more important to the new, smaller TWX. Also, TWX is looking to be more integrated, similar to Disney (DIS), and animated properties offer the best cross platform synergies in media.
CBS is a long shot buyer as it seeks to diversify from its reliance on advertising, particularly local advertising. CBS has a stretched balance sheet but recently refinanced its 2010 maturities relieving pressure. In addition, CEO Les Moonves is not shy and would gladly do a controversial deal if he thought it was in the interests of the company. In fact, he just did that when he bought CNET.
LGF has been in Carl Icahn’s sites for several months. Sale to Liberty might be a good alternative. Liberty already owns a movie network in Starz and has started Starz Media for original productions similar to HBO or Showtime.
I think both DWA and LGF are overvalued presently and if no deals or stronger rumors emerge both are vulnerable to a pullback.