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Strategy of DreamWorks Animation CEO Jeffrey Katzenberg is questioned

'It does look desperate,' analyst says of strategy by DreamWorks Animation CEO Jeffrey Katzenberg

It has been a rough month for Jeffrey Katzenberg.

In the space of a few weeks, the mogul and co-founder of DreamWorks Animation SKG Inc. has been rebuffed by three high-profile potential buyers: Japanese telecommunications giant SoftBank Corp., Rupert Murdoch's 21st Century Fox and Hasbro Inc.

Katzenberg, known for driving a hard bargain, may have overplayed his hand. The studio executive was said to be pursuing a deal worth about $3 billion — about $1 billion above the company's current market value. In the case of Hasbro, investors also balked at the idea of getting into the volatile movie business and the company risked alienating its main licensing partner, Walt Disney Co.

The collapse of deal talks left some Wall Street analysts wondering what Katzenberg's strategy is.

"It does look desperate," said Eric Wold, a media analyst with B. Riley & Co. "I'm sure [Katzenberg] can find something if he keeps looking around, but I don't think these actions are going to help the valuations."

The succession of failed deals undermined DreamWorks Animation's stock price, sending it on a roller coaster ride since late September. Investors sent shares up 26% when SoftBank appeared poised to make an acquisition, before the stock came crashing back down again.

The biggest volatility came Monday after Hasbro backed out. Shares plunged 14% in the biggest one-day drop since the studio went public in 2004. The stock closed Wednesday at $22.70.

But, even before Wall Street began speculating about a new buyer for DreamWorks Animation, the stock had already been suffering. Shares have fallen 36% this year as the company's financials have been squeezed by box-office misfires.

"This is a company that is facing major operational challenges," said Vasily Karasyov, an analyst with Sterne Agee.

The failed talks mark a rare and humbling moment for Katzenberg, a legendary figure in Hollywood.

Katzenberg, 63, helped revive Disney's storied animation studio in the 1980s and 1990s with such hits as "The Lion King" and "The Little Mermaid." After a highly public feud with his former boss Michael Eisner, Katzenberg left to form his studio 20 years ago with partner director Steven Spielberg and music mogul David Geffen.

The Glendale studio, which was spun off into a separate company in 2004, churned out such big hits as the "Shrek," "Kung Fu Panda" and "Madagascar" movies.

In recent years, however, the studio has struggled to replicate the success of its earlier films. Three of the studio's last five films have resulted in write-downs: "Rise of the Guardians," "Mr. Peabody & Sherman" and "Turbo."

The misfires have eroded profits and led to cost-cutting at the studio, including the elimination of more than 300 jobs last year after taking an $87-million write-down on "Guardians."

"This is a company that continues to fail to live up to expectations," said Rich Greenfield, an analyst with BTIG, who has a sell rating on the company. "I don't know why somebody would want to buy them."

DreamWorks bounced back this summer with the hit "How to Train Your Dragon 2," which has grossed more than $618 million at the worldwide box office. The studio's next animated sequel, "Penguins of Madagascar," is expected to do solid business when it debuts next week.

The outlook for next year is more uncertain, however.

"DreamWorks has a relatively rough year ahead of it," said Tony Wible, a Janney Capital Markets analyst.

Wible and other analysts do not have high hopes for "Home," an original movie due out in March.

And, as The Times reported this week, DreamWorks has decided to push back the release date for "B.O.O.: Bureau of Other Worldly Operations," two people close to the studio said.

The movie, directed by Tom Wheeler and featuring the voices of Bill Murray and Melissa McCarthy, was set to debut June 5. But DreamWorks executives are weighing releasing the movie in fall 2015 or in spring 2016.

Katzenberg was said to be unhappy with the progress of the film and concerned about the competition next June, when Pixar will release its movie "Inside Out."

A spokesman for DreamWorks Animation said: "Animated features are our most valuable asset and we regularly evaluate how to maximize their value, including determining the most opportune time to release a film."

Late next year, DreamWorks will release the third installment of the "Kung Fu Panda" franchise. The movie is expected to do well, especially in China, but could lose business to Disney's "Star Wars: The Force Awakens," which opens five days earlier on Dec. 18.

The box-office challenges explain why Katzenberg has been eager to find a buyer sooner rather than later. Although DreamWorks remains financially sound, operating as a stand-alone movie studio will be increasingly challenging, analysts say.

For instance, rival Walt Disney Co. is able to shore up its balance sheet via a variety of businesses, including theme parks, television networks such as ESPN, and the Marvel franchise. DreamWorks cannot offset its losses when an animated movie sputters. Nor can it count on once-booming home video sales to help drive profits, given the collapse in the DVD business.

What's more, the market is more crowded with new rivals that can produce popular movies at lower cost.

Universal Pictures and Warner Bros. have scored some surprise box-office hits with the "Despicable Me" films and "The Lego Movie," respectively. Disney also has raised the competitive stakes with such releases as "Frozen," the highest-grossing animated movie of all time.

"We have been inconsistent," Katzenberg acknowledged in an interview this year. "The only thing I can guarantee you is we are our harshest critics."

He declined to comment for this story.

Despite the uneven box-office results, DreamWorks could still be an attractive target for suitors.

One bright spot has been its investments in television and digital media at a time when more advertising is moving online.

DreamWorks last year signed a landmark deal to produce 300 hours of animated shows for the Netflix streaming service. It also acquired Awesomeness TV, the popular teen YouTube network, for $33 million. DreamWorks has been in talks to sell a stake in the venture to Hearst Publishing.

Revenue from television and other non-film businesses is expected to grow to 35% of the company's overall revenues of about $1 billion in 2015, up from 22% in 2011, Wible said. "He's done a good job of getting DreamWorks diversified," Wible said of Katzenberg.

DreamWorks also has strong business ties to China.

That could make it attractive for a Chinese investor eager to expand into Hollywood such as e-commerce giant Alibaba. DreamWorks operates an animation studio in Shanghai with Chinese partners that is producing animated and live-action content for Chinese and international markets, including "Kung Fu Panda 3."

"The company is still a potentially attractive takeover play," said Tuna Amobi, an equity analyst at S&P Capital IQ. "Jeffrey may have to lower his expectations now and perhaps be a little more amenable to a deal he might have otherwise rejected."

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