A new Hollywood toy story? Hasbro in talks to buy Dreamworks Animation

Transformers were a 1980s Hasbro Inc. (HAS) toy craze that has been parlayed into a megabucks action-movie franchise in recent years. The “Penguins of Madagascar” is set to hit theaters this Thanksgiving from DreamWorks Animation Inc. (DWA) as action figures of its glib penguin characters hit stores ahead of Christmas.

This symbiotic relationship between kids’ playthings and kids films forms the core rationale behind the reported interest by Hasbro in acquiring DreamWorks Animation.

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The New York Times is reporting that the companies are discussing a deal, with Dreamworks Animation co-founder and CEO Jeffrey Katzenberg said to be seeking more than $30 per share, at least a 35% premium to Wednesday’s closing price, which would value the company above $2.5 billion.

Katzenberg has previously explored a sale of the studio behind the “Shrek” and “Kung Fu Panda” franchises. As recently as late September, DreamWorks’ shares briefly popped to the high-$20s on those rumors, but gave it all back until Thursday’s news of Hasbro talks.

Wall Street may be wary of these unconfirmed reports given they have fizzled before, which perhaps explains why DreamWorks stock, up 16% near $26, remains well below the posited $30 asking price. DreamWorks has long been viewed as a likely takeover target at some point, and this news probably has all potential buyers considering their options.

Whether a combination is consummated or not, such a deal would address concerns and further the ambitions of both companies. As an independent publicly traded studio, DreamWorks lacks scale and rides a constant financial roller coaster based on the fortunes of a handful of annual film releases. Katzenberg has been dabbling in partnerships for retail, TV and amusement park ventures to broaden the company.

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As I discuss in the attached video with Yahoo Finance’s Milanee Kapadia, Hasbro has long harbored ambitions of becoming a media player, for a time partnering with Discovery Communications Inc. (DISCA) in the Hub children’s cable network and mining its Transformers and My Little Pony character sets for movie rights. Traditional toys are under pressure from screen-based games, and media properties can be an attractive growth asset beyond the toy box.

A tidy way of viewing a Hasbro-DreamWorks union is as a cobbled-together version of Walt Disney Co.’s (DIS) integrated approach to entertainment and merchandising. Disney’s kid-centric animated Princesses and Muppets brands and its broader Marvel films are the basis for a huge merchandising operation Disney controls outright.

One important question, however, is how a merger with DreamWorks might color Hasbro’s relationship with Disney, which just shifted rights to the “Frozen” toy line to Hasbro from Mattel Inc. (MAT).

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Disney has done a superb job in reviving the Muppets as a film franchise and surfacing obscure, secondary Marvel characters to form the basis of its massive “Guardians of the Galaxy” hit last summer.

DreamWorks not long ago bought Classic Media, owner of a library of older entertainment assets such as Casper the Friendly Ghost, Lassie and Rocky and Bullwinkle. It used this trove to make a “Mr. Peabody & Sherman” film last year, which was reviewed with some enthusiasm but wasn’t a box-office hit.

Still, it makes sense that DreamWorks would seek to mine these older characters for updated movies and TV shows to introduce them to a new generation – with a toy tie-in for each one.

A broader inference from DreamWorks being put in play (at least in the media) is that established content-production properties are quite valuable in a world where new technology-enabled media distribution platforms are proliferating. Now Netflix Inc. (NFLX), Amazon.com (AMZN), Google Inc.’s (GOOGL, GOOG) YouTube and Yahoo Finance parent Yahoo Inc. (YHOO) are all in the original-programming game and could use moviemaking know-how.

It’s likely no accident that Lions Gate Entertainment Corp. (LGF), the studio behind the “Hunger Games” films and “Mad Men” cable series, is seeing its shares climb more than 3% today. Alibaba Ltd. (BABA) has been said to be interested in taking a stake. True or not, Lions Gate remains one of the few big independent studios - and content remains king of the media jungle.

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