Looking More Favorably on Dreamworks Animation

Paul Allen announced that he is dramatically reducing his remaining position in Dreamworks Animation. Following up on the sale of 12 million shares last November, Allen will now sell an additional 15-17 million shares leaving him with just 6 million shares. Of the shares to be sold, 10-12 million will be sold in a secondary offering and DWA will buy back 5 million. The remaining 6 million shares will convert from Class C to Class A leading Allen to resign from the DWA Board. DWA has about 103 million shares outstanding so Allen’s stake will be about 6%, down form over 30% prior to the November sale.
DWA shares took the news hard falling about 8%. I suspect the need to sell 10-12 million shares in a secondary in a difficult capital market weighed heavily on the shares. A secondary concern could be that a Board member is selling out following a 30% upward move in the shares since March.
I’ve been cautious and wrong on DWA this year. I feared that Shrek The Third would fall short of estimates given its launch date between Spiderman 3 and Pirates of the Caribbean 3. In addition, there has been a downward trend in box office for CGI animated films that has been attributed to too many films and moviegoers no longer seeing anything new. Finally, I am a little worried that all the summer blockbusters will make for a very crowded DVD marketplace later this year which could crowd out every film’s sales by a modest amount.
All that said, I think the weakness in DWA ahead of the secondary might offer a good long side trade….

Shrek The Third has performed at least as well as analysts hoped. The studio’s next film coming this November, The Bee Movie, starring Jerry Seinfeld has some good early buzz and what looks like an effective early marketing campaign. The stock has good support from a number of high profile analysts which should lead to a strong underwriting cycle and lots of positive commentary ahead of the Shrek DVD and release of The Bee Movie.
I do not own DWA but I have moved the stock up my list of potential media longs with my eye on a multi-month holding period as opposed to my usual multi-year time horizon. Consider this post a head’s up, not a recommendation.