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— Analysis —
The dream worked because of Paul Allen. Nobody knows this better than the three amigos who launched a full-service studio in 1994 with a degree of optimism Hollywood hadn't seen since four of its stars set up United Artists three-quarters of a century earlier. And though much of the early optimism about DreamWorks SKG faded -- just as it had faded for progenitor United Artists -- the fledgling studio's major backer remained true. Better than true, in fact. Allen did more than seed DreamWorks SKG in March 1995 with $500 million in equity. The Microsoft Corp. co-founder eventually added $200 million to his original investment, mostly by buying out the interest of South Korea's Cheil Foods & Chemicals Inc., another original backer. This boosted his stake in the privately held studio commensurately, taking it from an initial 18% to 24% by the time DreamWorks decided to separate its animation arm from its live-action unit.
The separation cleared the way for an initial public offering of DreamWorks' animation arm -- the creator, by then, of "Antz" and "Shark Tale" as well as "Shrek" I and II. And that's exactly what it did in a timely bid to exploit the lofty multiples then commanded by DreamWorks' publicly traded competitor Pixar Animation Studios Inc. DreamWorks Animation SKG Inc., as the studio half run by co-founder Jeffrey Katzenberg was officially named, went public at $28 per share on Oct. 28, 2004. (DreamWorks' other two co-founders, Steven Spielberg and David Geffen, stayed behind in the studio's live-action half, which remained private.) The IPO, in turn, placed a value of about $1 billion on the 36.8 million Class A shares assigned to represent Allen's animation interest in the separation. For the quantification of Allen's remaining interest in the no-longer self-contained studio, it would take Paramount Pictures Corp.'s agreement to buy DreamWorks' live-action half in December 2005 for $1.6 billion. Of this amount, however, only $774 million was attributed to equity. And so the 24% due Allen from the sale of DreamWorks SKG to Paramount came in just under $200 million. Had Allen cashed out then, the financial sponsor would have made about $1.2 billion from his $700 million investment a decade or so earlier. This would have generated him a return of about 5.5% a year -- a rate more associated with passbook savings than with private equity. But Allen didn't cash out. Instead, after selling 4.9 million Class A shares during DreamWorks Animation's IPO, regulatory filings show a systematic winding down of his investment through a half-dozen sales. Of these sales, the most significant occurred on a single day in August 2007. That's when Allen unloaded 15 million of DreamWorks Animation's Class A shares for $467 million. The bulk of them -- 10.2 million shares -- were transferred through a secondary offering Goldman, Sachs & Co. and Bear Stearns Cos. underwrote. DreamWorks Animation itself repurchased the remaining 4.8 million shares. Allen attributed the sales decision to "an ongoing effort to rebalance" his private equity portfolio. And with only 6.7 million DreamWorks Animation Class A shares left in that portfolio, representing 8.3% of the total, he also stepped down as a company director. (Even when his pre-IPO assignment of 36.8 million Class A shares gave Allen 48% of the class total, a lock on supervoting Class B shares by DreamWorks' founders vested them with more than 70% of the voting power.) The divestitures prompted by Allen's exit decision were so well executed that DreamWorks Animation's stock price actually rose 4 cents a share, to $31, the day of the big trades. Stock researcher Pali Capital Inc. even applauded the removal of what it called "the Allen overhang," while DreamWorks Animation CEO Katzenberg took the occasion of his biggest shareholder's graceful exit to declare: "There would be no DreamWorks without Paul Allen. I want to thank him for all he has done for DreamWorks Animation as a board member and as a shareholder." Additional sales in November 2007 and May 2008 reduced Allen's DreamWorks Animation Class A holdings to just 3.1 million shares. This remaining inventory, worth less than $100 million at current prices, suggests Allen is now barely ahead of the $1.2 billion he could have obtained by cashing out of 2-1/2 years ago. The additional time, meanwhile, has reduced his annual rate of return from his DreamWorks' investment to less than 4.5%. But it has also secured Allen's reputation as a patient and considerate private equity player with whom all of Hollywood would love to partner. The name of Microsoft's co-founder has even been imbued with iconlike status. Last month, during a discussion about DreamWorks' likely defection from Paramount to start anew with India's Reliance ADA Group, a key issue was whether DreamWorks negotiator Geffen would sign a deal for at least $500 million in financing from Reliance or use the publicity generated by his negotiations with the Indian company to stir up other prospects. After all, a source says on comparing the potential role of Reliance
in DreamWorks' next incarnation to the one played so magnanimously by
the studio's original backer, "[Geffen's] already got his Paul Allen." -- View the complete PE Deals of the Year slideshow -- |
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