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The Dream Behind NBCU's DreamWorks Deal

About one year after abandoning its effort to become the uber-dominant distributor in the country when it walked away from its $67 billion purchase of Time Warner Cable, Comcast has turned its attention to programming, with its NBCUniversal unit's $3.8 billion deal to buy DreamWorks Animation, a move that will help boost its content library while potentially seeding its theme park business with new characters to build attractions around.

In DreamWorks Animation, NBCUniversal gets access to a film library that includes Madagascar, Kung Fu Panda, Shrek and How to Train Your Dragon, as well as a growing TV production arm that has churned out programming like Dawn of the Croods, Turbo and more for Netflix and other distributors. In NBCU, DreamWorks Animation finally gets the deep-pocketed parent that can help it produce more films and, with its cable and broadcast networks, provide another outlet for content.

Reaction to the deal was mixed. DreamWorks stock soared 24% (up $7.75 each) on April 28 to $39.95 per share, while Comcast shares fell 15 cents each (down 0.24%) to $61.15 per share.

Some analysts criticized the deal as being too pricey – it represents a 50% premium to DreamWorks’s stock price before rumors of a sale began to surface. Others said the benefits included additional theme park revenue from high-profile attractions and potential cost-savings on the animation side. NBCUniversal’s animation arm – Illumination Entertainment, under which DreamWorks would fall after the deal closed – farms out production of most of its animated movies to Japanese companies for a third of the price that DreamWorks pays.

“[T]o us, this deal makes a lot of sense, less because of the added animation heft to Illumination Entertainment (the studio that created The Minions) but more for what it could mean for the Universal Theme Parks,” Telsey Advisory Group media analyst Tom Eagan wrote in a note to clients. “It's easy to imagine a Shrek, Kung Fu Panda or Madagascar ride at the Universal parks."

BTIG Research media analyst Rich Greenfield took another approach, arguing in a blog post that DreamWorks has been on the block for at least three years, hasn’t traded above $40 per share since 2010 (the Comcast deal values the shares at $42 each) and has no other potential bidders besides NBCU.

“While we believe Comcast acquiring DWA is a mistake, [Comcast chairman and CEO] Brian Roberts clearly believes the acquisition is a good use of Comcast’s capital,” Greenfield wrote.

The analyst added that what could be attractive to Comcast is DreamWorks's 51% stake in Awesomeness TV, but said he believes that is overvalued, too – Verizon bought a 24.5% stake in the short-form video company earlier last month for about $159 million. And Verizon plans to develop content with AwesomenessTV for its go90 mobile video service, a potential Comcast competitor.

“DreamWorks will help us grow our film, television, theme parks and consumer products businesses for years to come,” NBCUniversal CEO Steve Burke said in a statement. “… The prospects for our future together are tremendous.”

DreamWorks will be headed by Illumination Entertainment CEO Christopher Meledandri, wile current CEO Jeffrey Katzenberg will become chairman of a new digital arm – DreamWorks New Media, comprisig the company’s ownership interests in Awesomeness TV and NOVA. Katzenberg will also serve as a consultant to NBCUniversal.