The DreamWorks Animationstory is following a predictable narrative. After four of its last six movies took losses, the company is being forced to make drastic changes in an effort to get profitable again.
Continue Reading Below
To do so, the company announced on Jan. 22 arestructuring planthat includes downsizing its workforce by nearly 20%, selling some property, making top management changes, and decreasing the number of movies it produces each year. That restructuring process is now fully under way, with the recent sale of the company's headquarters in Glendale, California.
At a time whenWalt Disneyis increasing its movie production and benefiting from rising studio entertainment segment profits year over year, DreamWorks is scaling down and, in2015, will actually make just one movie.It's not all bad news for DreamWorks, though, and the company still has some positives going forward to pull operations back around. With the restructuring under way, the company is on track to save $30 million in 2015, and $60 million by 2017 thanks to these changes. With the stock near a two-year low, is now the time to get in for what could be a resurgence in the coming years following this restructuring?
Getting back to humbler beginnings?
The restructuring efforts announced in January didn't relay very much information about exactly how the sale of the company's California property would happen, and investors reacted negatively to the news. Now that the company has formally announced the sale of its 14.7-acre property in Glendale, Calif., to a subsidiary of SunTrust Equity Funding for $185 million, things look like they are on the right track for DreamWorks to resume operating as the income-producing company it was before.
The Glendale property, which includes 10 buildings and large college campus-style open spaces, became DreamWorks' headquarters in 2012. This is the kind of headquarters you would expect a well-performing, young, innovative media company to build -- one that would attract top talent and allow the company to keep making amazing films. However, now that the company can no longer claim to be well-performing, it makes sense for it to return to humbler beginnings and work on creating successful movies at lower costs.
The studio and its employees will actually continue working on the property under a leaseback agreement in which DreamWorks will pay $13.2 million a year plus an annual increase of 1.5% in rent to SunTrust. Hopefully, having to pay rent again will serve as a reminder to the company and its top managers of how it needs to get back to those humbler beginnings and keep costs low.
Other than the benefit of reminding DreamWorks' management of the need to operate in the low-cost way it had in the past, the transaction makes sense financially. The company will have a surge of cash now, and it will have only an annual leasing expense to remain working at the property while it gets back on its feet. DreamWorks has options every five years to extend its lease with SunTrust, giving the movie maker even more future flexibility.
DreamWorks is well known for its successes with quirky films like "Shrek"and "Kung Fu Panda," films that made the company a disruptive force in the animation business thanks to humor appreciated by both young and adult audiences. "How to Train Your Dragon 2," released in May 2014, did very well for the company, earning $619 million at theaters worldwide and winning an Oscar nomination for best animated feature.
The issue in the last few years has been that these highly creative and successful movies were mixed with plenty of movies that were not nearly as high quality and ended in losses.By pulling production back to just two films per year, DreamWorks CEO Jeffrey Katzenberg has committed to getting the company back to that previous level of quality on each film released.
A character from the soon to be released DreamWorks movie Home. Source: DreamWorks.
In 2015, the company will release just one animated feature film, a movie called "Home," due on March 27th. The movie, which features voices and singing from Jim Parsons andRihanna, is about aliens that come to Earth in search of a new home, but when they attempt to relocate the Earthlings off of their new home, are met with resistance from a small human girl named Tip. This fun movie looks to be in classic DreamWorks style -- the same humor and fun that made movies like "SharkTale" and "Flushed Away" successful. "Home" marks DreamWorks' 30th animated feature to date.
So, while DreamWorks stock has lost around a third of its value in the last year, the company looks to be reaching a bottom from which it can start to turn around to reach a much more profitable future. With more lean production and operations, which will hopefully lead to consistently high-quality movies in the years to come, this company could hold a lot of value for long-term focused investors.
The article Why DreamWorks Animation Selling Its Headquarters Is a Good Thing originally appeared on Fool.com.
Bradley Seth McNew owns shares of Walt Disney but DreamWorks' Shrekremains his all time favorite animated film. The Motley Fool recommends DreamWorks Animation and Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.