How Will Comcast Benefit from the DreamWorks Acquisition?



Financial upside to the DreamWorks acquisition

Comcast (CMCSA) is looking at developing new franchises that can be monetized effectively across all of its business segments. Late in April this year, Comcast took a step in that direction with its acquisition of DreamWorks Animation (DWA) for $3.8 billion. Comcast expects to close the acquisition by the end of this year.

Comcast’s senior executive vice president and chief financial officer, Michael J. Cavanagh, explained the rationale behind the acquisition at the JPMorgan (JPM) Global Technology, Media and Telecom Conference. He stated that DreamWorks Animation was making around two animated movies each year. He also cited analysts’ estimates, which stated that DreamWorks’ movies, television, and consumer products business should together have an EBITDA (earnings before interest, tax, depreciation, and amortization) of around $200 million each year. He further stated that Comcast believes that DreamWorks’ integration with NBCUniversal would improve these financials.


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Distribution deal with Fox

Comcast also mentioned DreamWorks’ distribution deal with 21st Century Fox (FOXA), which costs DreamWorks around $75 million a year. Comcast mentioned its intention to take that deal in-house in a timeframe of around two years, which would add “to the core earnings power of the company.”

Comcast also mentioned the $250 million of DreamWorks’ SG&A (selling, general, and administrative expenses) expenses each year and said that “it really doesn’t make sense to have a public company that makes only two movies a year. So we’ll be able to do quite a good job over a period of time to capture synergies there.”

Distribution deal with Disney

The Walt Disney Company (DIS) entered into a distribution agreement with DreamWorks Animation in August 2009. Under the terms of the agreement, Disney will distribute live-action movies produced by DreamWorks Animation under the Touchstone Pictures banner for a period of seven years. This agreement could be up for renewal this year. Considering Comcast’s acquisition of DreamWorks Animation, Comcast’s Universal Pictures could be interested in distributing DreamWorks Animation’s live-action movies rather than allowing Disney to distribute them.

As the chart above indicates, theatrical distribution and TV or SVoD (subscription video on demand) distribution were the biggest contributors to Disney’s studio entertainment segment. These businesses’ revenues were $732 million and $934 million, respectively, in fiscal 2Q16.

Disney makes up 0.83% of the SPDR S&P 500 ETF (SPY). SPY has a 3.5% exposure to the computer sector.


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