Analysts Skeptical On Deal For DreamWorks Animation

DreamWorks Animation Skg Inc's DWA big jump on speculation that it could be acquired by Hasbro, Inc. HAS stirred skepticism among analysts Friday.

Topeka's David Miller said the chatter marks the second time in six weeks -- and the seventh time he can remember -- that similar rumors have surfaced.

Reports of negotiations that could lead to a deal with Hasbro were carried Thursday by several news agencies citing unnamed sources, although the rumor is unconfirmed by the companies.

Recent merger talks between DreamWorks and Softbank were never confirmed by the companies, but a prospective deal reportedly fell apart in September when DreamWorks' controlling shareholder and Chief Executive Jeffrey Katzenberg rejected a $32 per share offer.

"We're not sure a full-on acquisition by Hasbro makes a lot of sense," Miller said in a research note. And he's not alone among analysts.

MKM's Eric Hander said it "makes no sense at all." Hander maintained a Neutral rating on Hasbro and said by entering the highly volatile movie business, Hasbro's "risk profile" would rise, while its profitable relationship with Walt Disney Co DIS could be endangered.

Hasbro products based on licensed Disney characters accounted for up to 30 percent of its revenue.

Moreover, Hander sees a poor partner in DreamWorks, dismissing the company for its lack of free cash flow and its spotty record of "profitable animated films."

Hander said a rumored bid of $35 per share for DreamWorks "extremely rich" and said a deal could endanger Hasbro's quarterly dividend.

Moreover, Katzenberg might be unrealistic about price others may be prepared to pay for his company.

FBR analyst Barton Crocket said Katzenberg has "a constructive view" of DreamWorks' value, which "make it hard for the seller and buyer to agree."

Offering a different take on the sense/no sense theme, Piper Jaffray's Stephanie Wissink said the deal "makes a lot of sense" and moreover would be "transformative" for Hasbro.

Wissink maintained an Overweight rating on Hasbro and $66 target, praising the potential deal's strategic and financial benefits, but acknowledged a risk to Hasbro's Disney business.

Hasbro was down about 5 percent since the rumor surfaced, trading Friday at $54.66. DreamWorks is up more than 17 percent since Thursday, trading recently at $26.16, up 2.5 percent for the day.