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The Bottom Line of Animation

Times Staff Writer

Just like the animals in its upcoming release “Over the Hedge,” who venture into an unknown and often unforgiving world, DreamWorks Animation SKG Inc. executives have been navigating some lonely, uncharted territory of late.

DreamWorks plans to announce its first-quarter earnings today, and analysts are downplaying expectations. No significant revenue is expected until later this year and the company’s stock is hovering about a dollar below its initial offering price of $28 a share, raising questions about the future of the studio that made the ogre Shrek a household name.

Computer animation may be booming, but as Walt Disney Co. prepares to fortify its position in the family entertainment marketplace by buying Pixar Animation Studios, DreamWorks will soon find itself the last remaining public animation outfit in Hollywood.

Unless, of course, someone buys it, too.

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“Anytime you have a franchise like ‘Shrek,’ it is always of interest to a major media company,” said Anthony Valencia, media and entertainment analyst for TCW Group, a major Pixar shareholder based in Los Angeles. “Any media conglomerate wants to have the same arrows in their quiver that their competitors do. Down the line, a company that feels they don’t have a presence in animation may feel uneasy about that vis a vis Disney.”

When Viacom Inc.'s Paramount Pictures Corp. acquired live action studio DreamWorks SKG late last year, it became a logical suitor for DreamWorks Animation. Already it has agreed to distribute DreamWorks Animation’s movies that use computer generated imaging.

Although its sister studio Nickelodeon Movies has co-produced computer animated fare such as “Jimmy Neutron: Boy Genius,” Paramount has yet to establish its own presence in CGI.

The studio is co-producing “Barnyard,” due out in July, with O Entertainment and Nickelodeon but has no in-house CGI division. Buying Glendale-based DreamWorks Animation would get Paramount into a game that several rival studios are already aggressively playing.

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Twentieth Century Fox has found success with its animation division, Blue Sky Studios. Fox bought Blue Sky in 1997 and co-produced the 2002 animated hit “Ice Age.” Its sequel, “Ice Age: The Meltdown,” has grossed nearly $500 million worldwide in the four weeks since its release.

Sony Pictures Entertainment will venture into the fray this year with “Open Season;" Warner Bros. with “The Ant Bully.”

DreamWorks Animation’s principals -- Chief Executive Jeffrey Katzenberg, former music mogul David Geffen and Microsoft Inc. co-founder Paul Allen, the company’s largest investor -- would probably not be of a mind to sell the company when the stock price is so low. It fell 35 cents to $26.75 on Monday, well below the $42.60 it reached in December 2004.

“I think there would be a lot of interest in [DreamWorks Animation] as an acquisition target, but I’m not sure there is that much interest in the principals for selling,” said Jeffrey Logsdon, an analyst with Harris Nesbitt Corp. With “Shrek the Third” and Jerry Seinfeld’s “Bee Movie” coming in 2007, he added, “there are no victory laps yet but things are going to get better.”

Still, the bleakness of the company’s immediate future could make it seem a bargain to potential bidders. During the company’s last earnings conference call with analysts, Chief Financial Officer Kris Leslie said “we do not expect to have any significant earnings in the first half of the year.” And some analysts believe that the stock might not rise significantly until the return of the huge green ogre 12 months from now.

Geffen has said he is not keen on the high-risk movie business, and Allen has made no secret of his desire to cash out some of his shares. In a March interview, DreamWorks Animation President Lewis Coleman said any offer would have to be contemplated, but he did not elaborate. The company has anti-takeover provisions to discouraging unsolicited bids. A DreamWorks Animation spokesman declined to comment for this story.

So far, there are no rumblings of a sale, said analyst DavidMiller of Sanders Morris Harris.

“The Disney-Pixar relationship was very unique,” Miller said. “Just because that happened doesn’t mean [DreamWorks Animation] is going to be taken out.... We are not hearing about any chatter or rumor that they are for sale.”

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The Securities and Exchange Commission is looking into stock trading around the time that DreamWorks Animation surprised Wall Street last year with earnings that fell short of expectations. The company is still recovering from a revenue shortfall from the “Shrek 2" home video and an overselling of “Madagascar,” which Katzenberg told investors was testing better than the original “Shrek.”

In the wake of these events, the company’s stock plummeted and Business Week declared that DreamWorks Animation had “lost Wall Street cred.”

With disappointing box office results for the studio’s last movie, “Wallace and Gromit: The Curse of the Were Rabbit,” DreamWorks Animation is counting on solid returns for “Over the Hedge,” due in theaters May 19. The film features the voices of Bruce Willis, Gary Shandling and Steve Carell, as a raccoon, turtle and squirrel who wander over a hedge into a suburban community.

Most analysts expect “Over the Hedge” to make less than last year’s successful “Madagascar,” which grossed more than $525 million worldwide and sold more than 14.2 million units in home video. The reason: Three weeks after “Over the Hedge” debuts, “Cars” will hit theaters June 9 -- Pixar’s first offering since “The Incredibles.”

“Given the competition it will face from ‘Cars,’ we’ve brought our box office estimates down in order to be more conservative,” wrote Kathy Styponias, an analyst with Prudential Equity Group. She predicted it would gross $321 million worldwide, compared with an earlier forecast of $351 million.


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