Shares of DreamWorks Animation (DWA) stock soared as much as 20% in premarket trading Thursday following news that the toymaker Hasbro (HAS) may be interested in purchasing the animation studio.
DreamWorks, the studio behind the Shrek, Kung Fu Panda and Madagascar franchises, is also said to be wooing Hearst as a potential partner in its online video business Awesomeness TV.
According to Deadline.com, which originally reported the story, DreamWorks is courting Hearst in hopes of turning Awesomeness TV into a joint-venture operation.
The report also said that DreamWorks CEO and entertainment mogul Jeffrey Katzenberg would like to see Hasbro scoop up DWA stock at $35 per share, a 56% increase to the DWA stock price at the ring of the closing bell on Wednesday. Before news of the potential deal hit the wires, DWA was off 37% in 2014 as poor financial performance, write-downs, and an SEC investigation related to those write-downs have weighed on the stock.
For Hasbro, the merger with DreamWorks would give the toymaker a legitimate film studio of its own, allowing the company more ways to double dip on its intellectual property and monetize the popularity of its brands.
A deal like this makes a lot of sense for both parties. In light of its recent financial woes, DreamWorks and DWA shareholders would clearly benefit from the merger, while HAS stock could gain significant long-term upside with this step to vertically integrate its business.
Hasbro has increasingly turned to Hollywood to squeeze more money out of its brands: The Transformers and G.I. Joe movie franchises, as well as the new movie Ouija, are all based on Hasbro’s toys and games.
Despite the potential benefit to Hasbro, HAS stock was down as much as 5% in early trading on Thursday.
While the price movements in DWA stock and HAS stock today show that Wall Street is clearly acknowledging the possibility of a Hasbro-DreamWorks deal, Wall Street doesn’t seem to think the $35 per share Katzenberg is reportedly seeking for DreamWorks is a realistic price. Although Deadline.com reported the $35 per share figure, Bloomberg sources only said that Katzenberg wanted at least $30 per share for DWA stock.
Assuming DWA shares stay near their elevated levels and close 15% higher on Thursday, a $30 buyout would mean 16.6% more upside remains for DWA stock, while a $35 buyout leaves about 36% in gains yet to be realized.
That’s quite a difference, and considering the fact that DreamWorks was reportedly in advanced talks with SoftBank (SFTBF) to be acquired for $34 per share in September and that fell through, I don’t blame Wall Street for discounting the possibility of this deal going through.
While this may seem like an interesting opportunity to buy DWA stock in hopes of a high-priced Hasbro acquisition, that’s quite a risky play. The more appealing, less risky stock to buy could be HAS in the event that this deal actually closes.
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As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid.
