Verizon Takes Big Stake In DreamWorks' AwesomenessTV: What Does It Mean?

Pacific Crest recommends buying Dreamworks Animation Skg Inc DWA shares after it announced the sale of its 24.5 percent stake in AwesomenessTV to Verizon Communications Inc. VZ, which implied a valuation of $650 million.

Commenting on the valuation, Evan Wingren of Pacific Crest said, "This exceeded our expectations for its current value (we estimated ~$570 million in our SOTP), and represents a 100% increase from its valuation when Hearst bought a stake in 2014, and >400% from its $128 million purchase price by DreamWorks in 2013."

B.Riley, in a client note, said, "In terms of immediate financial changes, we estimate this (deal) could add about $1.08 per share in value to DWA. Longer term, we view this as another long-term positive move to diversify DWA's overall business – especially with the New Media segment (i.e., ATV) growing at a rapid clip since its May 2013 acquisition."

Dreamworks will own 51 percent of AwesomenessTV, while Hearst Corporation has the remaining 24.5 percent. Dreamworks sold 24.5 percent in AwesomenessTV to Hearst in December 2014 for $81.25 million.

In addition, Verizon and AwesomenessTV (ATV) plan to create a premium short-form mobile video service produced by top Hollywood talent.

A press release from Verizon said, "The new service will operate as a new and independent brand, and feature premium transactional content for a variety of audiences on par with the highest-end content seen on television today. The new service will launch as part of the go90 offering and Verizon will fund the initiative through a multi-year agreement with AwesomenessTV."

"The content AwesomenessTV has produced for go90 has exceeded all our expectations with shows such as Guidance and Top Five Live. That's why we want to be in the AwesomenessTV business," Marni Walden, executive vice president and president of Product & New Business Innovation, Verizon, added in a statement.

Logical Partner

Wingren also sees Verizon as "a logical partner" as it already has a large stake in mobile-based programming intended for young adult audiences in go90, and is already buying content from ATV.

DreamWorks announced that annual revenues of ATV expected to more than double in the first 12 months of content delivery, which begins in 2016. According to Wingren, the guidance is "off of a 2015 revenue based of ~$73 million."

‘We have modeled New Media (which is primarily ATV) segment revenue of $98 million and $118 million in 2016 and 2017, which likely implies that there is at least $50 million of incremental revenue (depending on timing) not currently reflected in our model," Wingren wrote in a note to clients.

B. Riley said: "management guided to 2017 ATV revenues more than doubling from 2015 levels, which could drive 2017 revenues of more than $146MM – which is slightly ahead of our current $137MM 2017 revenue estimate."

However, the brokerage is not expecting that incremental revenue growth translating into incremental contribution margin, given its understanding that management had already planned to ramp its investment into ATV along with content/talent costs moving higher.

"Nevertheless, we view this announcement as a longer-term position and continue to look for a more attractive entry point ahead of a projected growth re-acceleration in 2018," B. Riley continued.

Wingren, who has an Overweight rating and $31 price target on DWA shares, noted that ATV is retaining the ability to sell new content being created for Verizon internationally, which could provide further upside in the future.

B. Riley has a Neutral rating and $22 price target on DWA shares, which fell 1.51 percent to $24.83.