DreamWorks Animation Deal With Fox Is Positive but Won’t Excite Wall Street, Analysts Say

DreamWorks Animation's deal with Fox eliminates uncertainly but analysts are more concerned with overall decline in the film business

Last Updated: August 22, 2012 @ 6:24 PM

DreamWorks Animation's decision to sign a new distribution pact with 20th Century Fox is a positive for the company, but it's not going to make Wall Street fall in love with a firm it's never been all that hot for, analysts tell TheWrap.

Indeed, DreamWorks Animation's stock was up slightly when it opened on Tuesday, but fell .62 percent to $17.61 in afternoon trading.

The issue, DreamWorks Animation watchers say, is that finding a new partner does little to solve the studio's larger problems — a faltering home entertainment market and an over-reliance on a slate of one to two films a year.

"One of their biggest problems is there is an overall skepticism about the movie industry and CG animation specifically," Marla Backer, an analyst at Hudson Square Research, told TheWrap. "The stock had a run-up in the aftermath of Disney's acquisition of Pixar, because they were seen as the only remaining indie animation studio for another large studio to buy. When an acquisition never materialized, a lot of people walked away because they did not see a lot of opportunities for growth."

Also read: DreamWorks Animation Signs Distribution Deal With Fox

The consensus on Wall Street is that after making clear that it would not renew its distribution deal with Paramount over a year ago, it was important for DreamWorks Animation to find a new partner. But Monday's announcement that Fox will handle marketing and distribution for DreamWorks Animation won't move the needle on its stock.

"It’s eliminated some uncertainty in the market," Tony Wible, an analyst with Janney Montgomery Scott, told TheWrap.

Though analysts believe Fox will be a capable partner, the fundamentals of the pact with DreamWorks Animation do not represent a substantial improvement in terms on the deal the animation house had with Paramount.

DreamWorks Animation will pay 20th Century Fox the same 8 percent distribution fee to release its films — theatrically, on home video and on international television — that it shelled out to Paramount.

But the studio is saying it's a win for its bottom line by noting that Fox will receive a lower fee of 6 percent on digital business than Paramount did. As part of the new five year pact, DreamWorks Animation will handle domestic TV distribution independently.

Also read: DreamWorks Animation Will Pay Fox Same Theatrical Distribution Fee as Paramount

Paramount received an 8 percent fee across all release channels, which DreamWorks Animation said it would no longer match going forward.

"It’s a positive to have those costs reduced, but it’s not a material amount," Michael Corty, an analyst at Morningstar, told TheWrap.

DreamWorks Animation's refusal to increase its payments to Paramount for rolling out its films led some to expect that its new deal would be substantially sweeter. Yet analysts told TheWrap that a fee of between 8 percent to 12 percent is the standard distribution rate for a studio of DreamWorks Animation's size. That meant the studio faced an uphill climb in finding a big studio partner who would be willing to bid lower.

Regardless, Corty said that he thinks that DreamWorks Animation's stock slide is largely attributable to its decreased profitability over the past five years, not to any uncertainty related to its distribution deals.

Some analysts indicated that Fox, which beat out Sony to score the DreamWorks Animation deal, might be the big winner. The studio has its own successful in-house animation unit, anchored by Blue Sky Studios, which has produced and distributed the “Ice Age” franchise. But by signing the distribution pact, it has a chance to strengthen its presence in an animation market that has been historically dominated by Pixar and DreamWorks Animation.

"News Corp. didn't have a big animated presence," Wible said. "By bringing DreamWorks Animation on board, you align with a competitor and you minimize conflict."