How DreamWorks Animation Can Claw Its Way Back

Layoffs, cuts, fewer films and a sinking stock, but reports of the studio's demise could be premature as strong assets and a new direction counter "a dire situation."

A version of this story first appeared in the Feb. 6 issue of The Hollywood Reporter magazine.

Reaction to the Jan. 22 reveal that DreamWorks Animation would undergo a massive restructuring — including a smaller film slate, 500 layoffs, $290 million in pretax charges and the departure of its vice chairman, chief marketing officer and COO — was practically apocalyptic, with one analyst wondering whether CEO Jeffrey Katzenberg's company has enough cash to survive another four years.

"DreamWorks is in a dire situation," wrote BTIG analyst Rich Greenfield. "It is hard to have confidence in DWA's liquidity situation beyond 2018." Greenfield warned that when distribution deals with Fox and Netflix end in 2017 and 2018, respectively, new arrangements will not be as lucrative for DWA, and the $50 million in cash the studio has on hand is not enough to keep it afloat, given it's expected to spend $110 million on restructuring alone in 2015.

While other analysts were also bearish, the predictions calling for the demise of DWA may be premature, given there are several ways Katzenberg can dig DreamWorks Animation out of the hole.

For one, DWA has borrowed only $200 million against its $400 million line of credit and it has an option for an additional $50 million on that line, giving it the ability to draw $250 million, if need be. The company has $300 million in bonds outstanding but also the capacity to raise about $100 million in additional debt. Insiders also say DWA is working on ways to better monetize its library, which includes VeggieTales, Mr. Magoo, Underdog and Casper the Friendly Ghost, all of which were acquired when it purchased Classic Media in 2012 for about $155 million.

The studio also has some unencumbered assets, the most valuable of which is its campus in Glendale, Calif., which it could sell for as much as $200 million and then simply lease back the space. Katzenberg, 64, is known as a headstrong, perpetually optimistic leader who might bristle at such a fire sale. But his board might not give him a choice. DWA also plans to spend $25 million less on the production of each film ($120 million, down from $145 million) and it is closing its Northern California facility. In all, the restructuring should save DWA $30 million in costs this year and about $60 million annually by 2017.

And while the film unit is clearly troubled — four of the last six movies have resulted in write-downs (Rise of the Guardians, Mr. Peabody & Sherman, Turbo and Penguins of Madagascar) — Katzenberg has put new co-presidents (Bonnie Arnold and Mireille Soria) in charge of filmmaking and is making good on his 2013 promise to diversify "from an animated feature film company into a multifaceted, branded-entertainment company." For its most recent quarter, DWA reported a $46.4 million loss, but its television segment showed a $2.3 million profit and consumer products posted a $4.2 million profit.

There also are signs that its digital acquisition AwesomenessTV is profitable (DWA reported a $1.2 million profit attributed to "other items," which consists largely of Awesomeness). DWA paid $33 million for Awesomeness in 2013 with a potential earn-out of another $115 million. Instead, DWA settled the earn-out last year for $80 million then sold 25 percent of Awesomeness to Hearst Corp. for $81.3 million. The net result is that DWA paid about $33 million for a 75 percent stake in a fast-growing, potentially highly profitable digital asset that has a perceived value of more than $300 million.

But by focusing on expansion and diversification, Katzenberg acknowledges he might have been distracted from Job No. 1: making profitable movies. "We want to get back to basics here and just do an outstanding job on two movies a year," Katzenberg told The Hollywood Reporter during a conference call Jan. 22. "Much of my time and efforts in the last couple years have been focused on expanding the company into these other businesses. … It's now time for me to turn my attention back to the core business."

DWA has scrapped one project, Bollywood Superstar Monkey, and thrown B.O.O.: Bureau of Otherworldly Operations back into development. It will release only one film in 2015, Home, starring Jim Parsons, Rihanna, Steve Martin and Jennifer Lopez, followed by two films in 2016 (Kung Fu Panda 3 and Trolls) and two in 2017 (Boss Baby and The Croods 2).

Katzenberg still has his work cut out, though, if he intends to impress Wall Street. A day after he announced the restructuring, shares of DWA plunged to a 52-week low of $18.30 before recovering a bit, ending the day down 8 percent to $19.67. "We think DWA is in a precarious financial position. … If the company's 2016 film slate does not perform well, the company could face a serious liquidity crunch," wrote Cowen & Co. analyst Doug Creutz, adding that "layoffs and management turnover are usually disruptive and morale-draining and often damaging to a company's culture." On Jan. 26, longtime DWA producer Kristine Belson left to run Sony Pictures Animation. And sources say Katzenberg recently hired an investigator to determine who leaked internal company information to the press in November.

While cutting film production will save money, it also lessens the probability of creating new hit franchises, says Steve Birenberg of Northlake Capital Management. "Film production is a tough business. That is why it works best if you make 12 to 20 films a year like most major studios," he says. "You are going to have hits and misses. DWA acts like a big studio but they have no portfolio to provide a margin for error."

Others, though, say that the problem with DWA boils down to the quality of its films, not quantity. Some have complained that its movies rely too much on pop culture references, so that they aren't as timeless as Disney and Pixar films. Others say DWA is repetitive, given that nearly all of its films feature some version of a nerdy or disenfranchised outsider who becomes the hero — and descriptions of Home, due March 27, indicate it will follow this pattern.

"DreamWorks' animated films often seem to fail to have a quality family moral. Their movies often are more boy-focused, with noisy, grotesque elements, and successful DreamWorks characters are ogres, dragons and penguins," says Stephen Winzenburg, a communications professor at Grand View University and author of TV's Greatest Sitcoms. "By comparison, Disney and Pixar films reach a broader demographic with more relatable storylines and music, while characters are princesses, cars and futuristic families. DreamWorks Animation has had its share of successes, but the company seems to miss having a consistent vision that will attract a broad enough family audience."

Not all of the analysis of DWA is negative, though. On Jan. 26, analyst Eric Wold upgraded the company's shares, in part because the stock was so low, but also because he thinks that DWA is still an acquisition target, even though Katzenberg failed to sell the studio for an estimated $35 a share to potential suitors Hasbro and Japan's SoftBank.

"This actually creates the perfect opportunity for the board to consider an acquisition at a valuation closer to current levels," Wold wrote in his research note. "A deep-pocketed buyer could provide capital, a shift in viewpoint and creativity as well as an ability to pursue the public markets in a few years when financial results are likely to be more inspiring."