DreamWorks' IPO, Disney's Nightmare


By Ronald Grover The hits just keep on coming for Michael Eisner -- and not necessarily the good kind. The Disney (DIS) chief executive, under fire for apparently driving away Steve Jobs's Pixar Animation (PIXR) unit, now has to watch his one-time studio chief Jeffrey Katzenberg take dead aim at Disney's animation stronghold. Katzenberg, who in 1994 left Disney to form DreamWorks SKG with fellow moguls David Geffen and Steven Spielberg, will head DreamWorks soon-to-be spun-off animation unit, which filed its initial public offering on July 21.

The announcement that Katzenberg will head the publicly traded company is just DreamWorks' latest shot across Disney's -- and Eisner's -- bow. DreamWorks' Shrek 2, released in late May, has grossed more than $410 million at the U.S. box office, pretty much trampling prospects for Disney's animated Home on the Range, which has grossed a dismal $49 million. With its IPO, DreamWorks intends to raise $650 million, of which it says it will retain $175 million to make two computer-generated films a year.

Disney has said that it's gearing up its own animated-film unit to make computer-generated flicks, having determined that the market for traditionally hand-drawn films has begun to wane, but DreamWorks clearly has a headstart.

KEEPING PRIVATE. Insiders have been saying for months that an IPO was coming, in large part so that Katzenberg and his fellow moguls could reward employees who have largely worked without bonuses as the company has suffered intermittent dry spells with its live-action films and TV series. (To read how BusinessWeek broke the story in May, see "Dreamworks' IPO Prequel".) Even last year, DreamWorks' animated unit lost $189 million, the IPO says, as hand-drawn films Sinbad and Spirit: Stallion of the Cimarron flopped at the box office.

DreamWorks says it has six computer-generated films in various stages of development through 2006, including one that sources say is Shrek 3, slated to open Christmas, 2006. Later this year, it will release Shark Tale, which features the voices of Will Smith and Robert De Niro. DreamWorks has said it, too, will likely no longer produce hand-drawn movies.

DreamWorks officials declined to comment on the IPO, because they're in a quiet period. The IPO is expected to go to market sometime later this year. But filings with the Securities & Exchange Commission say Geffen and Katzenberg will both sit on the board, with Katzenberg acting as president and CEO. The chairman will be Roger A. Enrico, the former chairman of PepsiCo (PEP). Spielberg won't sit on the board or have the ability to designate a board member, according to the offering. Those with knowledge of the situation say the director opted out of a board seat, not wanting to make public the amount of money he receives for directing DreamWorks' films.

DISNEY'S BIND. Dreamworks' S-1 filing doesn't spell out exactly what Spielberg, Katzenberg, and Geffen would each receive from the spin-off, but it does indicate that Geffen and Katzenberg, who will have voting Class B shares that are worth 15 times Class A stock, would control the company. Spielberg is expected to receive an equal number of shares, but the filing doesn't spell out what type of shares. Microsoft (MSFT) co-founder Paul Allen, who owns a 24% stake in DreamWorks, will be issued special Class C stock that will give him a board seat, but his stock doesn't carry any more than a single vote per share.

What does this all mean for Disney, which now could face a well-financed competitor in DreamWorks as well as Pixar, which at last count had more than $740 million in cash, investments, and receivables on its own books? If Pixar walks, as its contract with Disney allows it to do sometime next year, Disney will be in a bit of a pickle. You have to think the folks in the Magic Kingdom are looking for some way to restore the animation franchise that once ruled the industry. Grover is Los Angeles bureau chief for BusinessWeek


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