DreamWorks Animation (Nasdaq:DWA) – Investment Memo – 8/28/15

Recommendation: Short DreamWorks (Nasdaq:DWA) equity

Current Stock Price: $20.29

Thesis

DreamWorks Animation (DWA) is a low quality business that trades at an elevated valuation

due to the belief that the struggling film studio can turn itself around and capitalize on the

growing market for animated films. However, DWA will be unlikely to create meaningful

shareholder value over the long-run because its business model provides better economics to its

supply chain. Opaque and gimmicky accounting practices, revenue that is inherently

unpredictable and a management team that has consistently broken promises and missed targets

raise red flags that call into question the economic reality of the Company. After recently

resetting expectations and declaring 2015 to be another transitional year, DWA still trades for

sky high valuation multiples. Using optimistic assumptions, DWA is at least ~30% overvalued

on a sum-of-the-parts basis and likely worth much less if the studio’s next slate of movies

underperform at the box office

Company Overview

Description: DWA operates an animation studio that produces box office films and TV

shows. Since its founding, it has developed many famous characters (e.g. Shrek, Kung Fu

Panda) which it also licenses for toys and consumer products. DWA has recently

expanded to managing YouTube channels in its New Media segment

Customers: DWA targets the global children’s entertainment market

o ~55% of revenue is international

Strategy: DWA releases 1-3 animated feature films per year. DWA’s goal is to develop

lasting intellectual property that it can monetize across multiple channels over many

years (film releases, sequels, TV spin-offs, merchandising, licensing)

o Historically, the Company focused on film production and merchandising;

however, DWA has diversified into TV production, managing YouTube channels

and extending its licensing to destination attractions in order to better monetize its

intellectual property and generate more consistent financial results

The Bull Case Argument

DreamWorks is a “mini-Disney” with highly valuable intellectual property that can be

better monetized by current diversification initiatives

According to the Motion Picture Association of America (MPAA), global box office

ticket sales have grown 24% from 2010 to 2014 and are expected to keep growing due to

Capitalization Financials Valuation

Market Cap $1,748 LTM Sales $752 EV / LTM Sales 3.0x

Cash $122 LTM Growth 20.9% EV / 2016E Sales 2.3x

Debt $649 LTM EBITDA $104 EV / LTM EBITDA 21.9x

Enterprise Value $2,275 LTM Margin 13.8% EV / 2016E EBITDA 18.2x

$ in millions. Data as of 8/28/15 (Q2 2015). Financial projections based on Wall St. consensus estimates.

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rising ticket prices in the developed world and larger audiences internationally.1 This is a

strong trend for DreamWorks because it has global distribution and its films appeal to

international audiences

In recent years, animated films like Frozen, Toy Story 3 and Shrek have generated large

box office revenues and point to the trend for animated films having a higher commercial

success rate than live action films

DWA’s stock is undervalued because the Company has under-earned its potential in

recent years due to poorly performing films

o The Company’s legacy includes a run of 17 box office hits in a row between 2000

and 2012. This legacy shows that DWA has a proven formula for churning out

theatrical hits

o The recent announcement to hire Bonnie Arnold and Mireille Soria as co-

presidents of Feature Animation and downsizing the production budget to 2 films

per year (from 3) will increase the quality of upcoming film releases

DWA is experiencing rapid growth in its highly profitable Consumer Products, TV and

New Media businesses which will help the company generate more consistent financial

results because these segments do not depend on film release cycles

DWA’s JV in China, Oriental Dream Works (ODW), will allow the Company to tap into

the large, growing Chinese box office market

CEO Jeffrey Katzenberg is a Hollywood legend with 4 decades of experience at top

studios. His vision for DreamWorks and industry relationships will help propel the studio

to success. His 10% ownership of DWA aligns his economic interests with shareholders

Poor Business Model Quality

DreamWorks discloses that the process of making each animated films takes three – four

years. Each film involves writers, artists, software engineers and managers and can

involve hundreds of people along the way

Given the long process of making each film and the amount of man hours spent, making

an animated film is extremely capital intensive and the studio (DreamWorks) must make

the upfront investment and assume all the financial risk in production 1 MPPA, “2014 Theatrical Market Statistics”. http://www.mpaa.org/wp-content/uploads/2015/03/MPAA-Theatrical-

Market-Statistics-2014.pdf

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Since 2007, the average production budget for a DreamWorks film has been $145

million. DWA has targeted bringing down production costs to $130 million per film

In addition to the production budget, a marketing budget of $50 - $90 million is used to

place advertisements and market a film. The marketing expenses are borne by the

distribution partner (Fox for DWA)

After three to four years of work and spending upwards of $200 million to make and

market a film, the film can be released. However, regardless of how much money is

spend on a film, there is no proven formula to guarantee box office success

o For example, DreamWork’s highest budget film, “Monsters vs. Aliens”, had a

budget of $175 million and was a flop. The film grossed $382 million. After

paying for expenses, DWA lost over $60 million on the film

o Disney, a best of breed studio, has also had inconsistent box office runs, losing

money on several animated films in recent years including “Treasure Planet”,

“Home on the Range” and “Chicken Little”

Grossing $382 million on a movie like “Monsters vs. Aliens” sounds like a lot, but the

money is split between distributors and marketers before DWA gets paid

o Marketing costs must be fully recouped. The marketing partner also gets an

additional 8% of the gross box office revenue

o Theater operators and distributors receive ~40% of gross ticket proceeds

o DWA’s estimated economics on this film = $382mm box office sales - $88mm

marketing budget - $31mm marketing fee - $153 theater & distributor revenue

share = $111mm DWA revenue on this film - $175mm production budget =

$64mm loss on this film (before corporate overhead costs)

From 2004 to 2012, DWA had an average gross profit of 32% per film. From 2012 to

2015, DWA’s gross profit per film has been 2% (see appendix for details)

o In order to turn a profit, DWA must successfully monetize its intellectual property

through merchandising and product licensing

In addition to taking on all of the upfront financial risk, DWA is paid last (after

distributors and marketers). At the end of 2014, DWA had $432 million in outstanding

receivables or 230 receivable days

Why is Disney successful and DreamWorks not?

o Disney as well as the other major studios is a fully integrated media platform with

control over marketing and distribution, Disney has greater scale in production

with more studios and more channels for monetization (TV, radio, parks, ect.)

o Disney is able to capture greater economics in its distribution of films and is

better able to monetize its intellectual property outside of theatrical releases with

its numerous media and vacation properties

o With DWA only producing 2 movies a year, it has a much higher concentration of

risk if a film is not a commercial success

Accounting Issues

Aggressive Cost Capitalization

o Because of the long timeline in making and releasing a film, DWA uses accrual

accounting to attempt to represent the economic relationship between sales and

expenses. This has resulted in DWA having a great deal of discretion and use of

estimates with its accounting practices

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DWA capitalizes production costs for film and TV and amortizes the

capitalized costs over the exhibition period that DWA recognizes the

revenue. Overhead costs are expensed as incurred

o While a majority of cash costs are capitalized, DWA does not go into detail as to

how much costs are being capitalized

From DWA’s 10K: “Capitalized production costs represent the costs

incurred to develop and produce our animated films and television

series/specials, which primarily consist of compensation (including

salaries, bonuses, stock-based compensation and fringe benefits) for

animators, creative talent and voice talent (which, in the case of sequels,

can be significant), equipment and other direct operating costs relating to

the production (including production overhead)”

o Looking at the statement of cash flows, the “Film Inventories” item tracks cash

production costs; however, the line item shows that DWA is incurring higher cash

costs than it is reporting in the income statement

o

o Another sign that DWA’s capitalization policy is aggressive is the amount of

capitalized stock based compensation (SBC). SBC is typically reserved for

division head’s and executive management, so the fact that DWA is capitalizing

more SBC than it is expensing is puzzling

o

Adj. EBITDA vs. Cash Flow

o DreamWorks reports Adj. EBITDA, but the reconciliation schedule from Net

Income to Adj. EBITDA takes up an entire page and has 13 separate add-back

lines, including 5 separate add backs for impairments (3 restructuring related)

o Over the last 3 years, DWA has incurred $571 million in impairment charges. The

vast majority of these charges are related to capitalized expenses. Some of the

write-offs are due to scrapped film projects that will never be released and others

are related to films that underperformed

o DWA is obfuscating the poor economics of its business by aggressively

capitalizing expenses and then washing the capitalized expenses in huge

impairment and restructuring charges. This is surprisingly gamey accounting and

2011 2012 2013 2014

Cost of Revenues 480,747 644,634 416,383 681,113

Impairments 0 158,000 49,682 308,815

Adj. Cost of Revenues 480,747 486,634 366,701 372,298

Δ in Film Inventories 454,704 449,974 440,416 484,285

Difference (26,043) (36,660) 73,715 111,987

2012 2013 2014

Expensed SBC 18,700 17,200 14,200

Capitalized SBC 17,044 18,531 19,302

Total SBC 35,744 35,731 33,502

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Wall St. appears to give the Company credit for it. Wall St. consensus estimates

show DWA earning Adj. EBITDA of $125mm in 2016E and $103mm in 2017E

o Management’s EBITDA has dramatically inflated DWA’s true cash flow. GAAP

Net Income has failed to track operating cash flow with DWA reporting higher

Net Income than CFO in several years (a side effect of aggressive accounting)

DWA has been FCF negative for the past several years and has generated

horrendous returns on its investments

o

Restructuring

o At the start of 2015, DWA announced a new restructuring program that would

result in the closure of its Glendale studio, layoffs of 500 employees (18% of

staff), the reduction of its annual film production to 2 films from 3, and the

scrapping of 2 films under production

o The restructuring came with $363 million in impairment charges, $54 million

related to employee termination and the balance related to capitalized film costs

o The 2015 restructuring program follows a 2012 restructuring initiative which also

reduced headcount and pushed back/canceled films

o The new restructuring is expected to save ~$60 million in annual overhead by

2017; however, these savings are expected to be fully offset by growth in DWA’s

non-film segments (Consumer, TV and New Media). Therefore, it will be unclear

how to truly measure the success of the savings program

o The constant restructuring and large impairment charges are troubling signs that

the DreamWorks studio model has broken down

Segment Reporting

o DWA’s segment reporting can empower investors to assess the economics of

DWA’s divisions and value the company on a sum-of-the-parts basis

o However, similarly to parent, DWA has encumbered its segment reporting with

numerous impairment charges that must be dug out from the 10Q’s and 10K’s

o Also, DWA does not allocate ~$140 million of overhead expenses which makes it

difficult to assess the true segment level profitability

2011 2012 2013 2014

Management EBITDA 141,463 116,428 144,778 95,302

Net Income 86,801 (36,422) 55,084 (309,614)

Cash from Oper. 33,502 28,397 26,992 (162,445)

Capex (43,239) (61,734) (39,385) (34,358)

Free Cash Flow (9,737) (33,337) (12,393) (196,803)

Cash Acquisitions 0 (169,450) (25,711) (63,605)

Investment in ODW (5,000) (3,000) (19,451) (20,645)

Cash Flow before Financing (14,737) (205,787) (57,555) (281,053)

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Financial Performance

DWA’s film segment declined in revenue from 2012 to 2014 by 22%. The segment’s

Adj. EBITDA declined by 42% over the same time period

o Kung Fu Panda 3 (January) and Trolls (November) are expected to be released in

2016. Kung Fu Panda will likely be a high grossing film

o Film segment sales are expected to be $430mm, $500mm and $535mm in 2015E,

2016E and 2017E, respectively (see appendix for details)

The consumer products business has grown from 2012 to 2014 by 33% to ~$65 million in

annual sales. Segment EBITDA over the same time period has only grown 8.4% to $10.7

million

o DWA aims to grow consumer by licensing its IP for the development of physical

attractions at hotels and on cruise ships called “DreamPlaces”. DWA receives

licensing revenue from its DreamPlace partners and revenue from the sale of

merchandise

o At the beginning of 2015, management guided consumer products revenue to

double to $120 million; however, in the last call, management backed down its

guidance to being flat year over year (~$65 million). Management cited

aggressive growth assumptions and lack of demand and currency fluctuations as

drivers of the underperformance

The TV segment has grown sales 36% from 2012 to 2014, but is down 3% from 2013 to

2014. Segment Adj. EBITDA is estimated to be approximately breakeven after allocating

corporate expenses

o TV growth stems from contracts with Netflix and German network SuperTRL to

deliver animated TV content over the next few years

o DWA guides for TV sales to be $200 - $250 million (from $102 million in 2014)

o The guidance range seems particularly wide for a revenue stream that should be

highly predictable (based on when TV episodes are released). In the 1st half of

2015, the TV segment only booked revenue of $73 million

o Given DWA’s track-record of missing guidance targets, it would not be surprising

for DWA to miss or come in at the low end of the range

o The CEO made the following comments on the Q2 2015 call when asked if DWA

expects to renew its Netflix TV production deal after 2017:

“We don't know what their needs will be going forward, and so we're

prepared to fill those to the extent that their needs change... If they want

less content, we need to make sure that we have buyers through other

channels out there. So today, it couldn't be going better. To predict where

we will be well over 2 years from now, a little hard for us to do”

The New Media segment has performed well, growing sales from $11 million in 2013 to

$49 million in 2014. LTM EBITDA for the segment was $16 million (30% margin)

o Management has not provided guidance for the segment; however, it can be

assumed that the segment can grow at 20-40% over the next few years

o December 2014, Hearst acquired a 25% stake in the New Media segment for

$81.25 million, implying a valuation of $325 million for the segment

Oriental DreamWorks (ODW) is a Chinese JV formed in 2013 and 45% owned by DWA.

ODW has been involved with the co-production of Kung Fu Panda and will help release

the film in China in 2016

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In 2015, DWA completed a $185 million sale-leaseback of its studio. Before the sale-

leaseback, analysts raised concerns about the Company’s liquidity. Current liquidity is

~$315 million in cash and credit facilities. Net leverage is ~5.1x LTM Adj. EBITDA

Despite DWA’s efforts to diversify away from its feature film business, theatrical films

still account for 65% of sales and 70 – 80% of EBITDA

o 2015 film financials are depressed due to only 1 released film

Segment Revenue Mix Segment EBITDA Mix

Valuation

Despite its low-quality business model, accounting issues and financial under-

performance, DWA trades at an expensive valuation relative to peers

DWA is currently trading at ~18.2x 2016E (Wall St. Consensus) EBITDA vs. Film and

TV peers trading at ~10.0x NTM EBITDA

o This EBITDA statistic is calculated in-line with management’s distorted Adj.

EBITDA and bakes in the commercial success of upcoming film releases

A sum-of-the-parts analysis indicates that in an optimistic scenario where DWA’s movies

achieve commercial success and the remaining segments hit management targets, DWA

is ~27% overvalued

o Segment financials are adjusted for corporate overhead

o DWA would likely be worth much less if it continues to miss targets

Current Implied Market Valuation:

78% 71% 66% 65%

10%15%

15% 18%

6% 10%9% 8%

2% 7% 7%

2012 2013 2014 LTM

Film TV Consumer New Media Other

119% 96%83% 74%

9%

9% 9%11% 6%

8% 12%

2012 2013 2014 LTM

Film TV Consumer New Media Other

LTM 2015E 2016E 2017E

Sales 752 825 1,005 1,047

Growth 20.9% 20.5% 21.8% 4.2%

Adj. EBITDA 104 15 125 103

Margin 13.8% 1.8% 12.4% 9.8%

Current Market Cap 1,748

Net Debt 527

Current TEV 2,275

EV/EBITDA 21.9x 150.2x 18.2x 22.1x

EV/Sales 3.0x 2.8x 2.3x 2.2x

$ in millions. Data as of 8/28/15. Projections based on Wall St. Consensus.

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Sum of the Parts Analysis (Optimistic Management Case):

Market Sentiment

Sentiment is fairly bearish on DWA, however, sentiment is likely not bearish enough

o The average sell-side analyst rating is Hold (4 Buy, 4 Hold, 3 Sell)

o Short interest in DWA is ~20% of the float

Despite the bearish sentiment, DWA trades at a high multiple of Adj. EBITDA, an

inflated measure of performance which bakes in optimistic growth assumptions

o There is ample room for Wall St. downgrades and estimate cuts

Executive Leadership

Jeffrey Katzenberg, CEO

o CEO and Director since October 2004

o Co-founder of the original DreamWorks (also makes live action films) in 1994

o Has over 30 years of Hollywood experience and served as Chairman of Walt

Disney Studios from 1984 to 1994

o Owns 10% of DWA’s stock worth $180 million or ~20% of his net worth

He owns Class B shares which control 60% of the voting power.

Katzenburg’s voting control will deter activist investors

o Katzenberg is a film industry legend; however, there seems to be little he can do

to improve the economics of his studio

o As Warren Buffet said, “When a management with a reputation for brilliance

tackles a business with a reputation for bad economics, it is the reputation of the

business that remains intact.”

Ann Daly, President

o President since July 2014

o Served as COO from 2004 to 2014

o Was head of animation department at Old DreamWorks

Film TV Consumer New Media Other ODW Total

2016E Sales 500 250 120 85 10 965

2016E EBITDA 96 8 22 20 (2) 144

EBITDA Margin 19.2% 3.2% 18.2% 23.2% (18.8%) 14.9%

EBITDA Multiple 10.0x 10.0x 12.0x 16.5x 12.5x

Sales Multiple 1.9x 0.3x 2.2x 3.8x 2.0x 1.9x

Implied TEV 961 80 262 325 20 150 1,798

Implied TEV 1,798

Net Debt 527

Equity Value 1,271

Current Market Cap 1,748

Under/(Over)-valued (27.3%)

$ in millions. Data as of 8/28/15. Projections based on Management Case assumptions.

Note: New Media segment valuation based on implied valuation from Hearst investment in Q4 2014. ODW asset valued at cost.

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o Ann is visibly Katzenberg’s right hand woman with her presence felt on calls. She

envisioned the TV production deal with Netflix and led negotiations with Fox on

the film distribution agreement

Fazel Merchant, CFO

o Joined DWA in September 2014 as CFO, replacing Lewis Coleman (CFO from

2007 – 2014)

o Previously served as CFO for DirectTV Latin America

Bonnie Arnold / Mireille Soria, Co-presidents of Feature Animation

o In late 2014, Bonnie and Mireille were hired to serve as executive producers for

all DWA theatrical films

o Both Bonnie and Mireille have storied careers in the family entertainment

industry

Risks to the Short Thesis

Buyout risk

o On September 28, 2014, the Wall Street Journal reported that Softbank was in

talks to acquire DreamWorks2

At the time, DWA’s stock was trading at $22.36

The talks may have been regarding a full-on acquisition or an Asian

JV/distribution agreement

o On November 12, 2014, Deadline.com reported that Hasbro was in talks to

acquire DreamWorks3

Hasbro’s board reportedly visited’ DWA’s campus to discuss film

projects, potential synergies and a sale price

o In both cases, acquisition talks fell apart within days for uncertain reasons. It is

rumored that Katzenberg wanted to sell at a price around $35/ share

o Buyout talks could remerge given Katzenberg’s apparent willingness to sell, but

it’s unclear if Katzenberg would be willing to meet a buyer at a reasonable price

o After buyout talks ended, DWA sold a stake in its New Media segment to Hearst

in December 2014 and launched a massive restructuring effort. This may signal

that Katzenberg resolved that he could not sell DWA and refocused his effort on

revitalizing the company

Hit movie risk

o A hit movie can contribute as much as $200 to $300 million in sales or 25% to

45% of DWA’s annual revenue and also bump merchandise sales

o Despite this huge impact on financial results, the below study of when

commercially successful (green) and unsuccessful (red) movies have been

released over the past 4 years does not show a strong correlation on short term

stock prices

2 Wall Street Journal, “SoftBank Is in Talks With DreamWorks Animation”. http://www.wsj.com/articles/softbank-

in-talks-to-acquire-dreamworks-animation-1411871716 3 Dealine.com. “DreamWorks Animation & Hasbro In Merger Talks; Deal With Hearst Looming”

http://deadline.com/2014/11/dreamworks-animation-hasbro-merger-negotiations-in-works-1201282751/

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DreamWorks Share Price vs. Successful (Green) & Unsuccessful (Red) Films

o

o Despite the lack of a clear pattern between hit movies and DWA’s stock price, it

is worth noting that Kung Fu Panda 3 will be released on January 29, 2016. Kung

Fu Panda 3 will likely be a global success due to the franchise’s past success.

However, after KFP3 is released, there are no other highly anticipated films in the

pipeline until “How to Train Your Dragon” in 2018. It may be advisable to time a

short around KFP3’s release date, especially if there is a significant pop in share

prices

Successful execution of growth in non-film segments

o To the extent DWA is able to successfully diversify its business away from the

unpredictable and unprofitable film unit, shareholders could benefit from more

consistent financial results

o The New Media segment is showing strong growth and profitability; however, at

~7% of total sales, the unit is still too small to matter

o DWA has already missed targets on doubling its Consumer Products segment and

has not given any indication that the unit will turn around

o It remains to be seen if DWA’s TV segment will be able to grow as expected.

Given, DWA’s track record with missing targets and the large growth that still

needs to occur in the second half of the year, it would not be surprising for the TV

segment to miss expectations

The TV segment has historically not been a profitable segment and will

likely not contribute meaningfully to EBITDA in the near term

o In a recent shareholder letter, Netflix praised the DWA produced show “Dragons:

Race to the Edge” as high quality original content. In recent years, Netflix has

expanded its promotion of exclusive/original content. There is risk in Netflix (or

other services) extending or expanding DreamWork’s content production contract

The Netflix deal lapses in 2017. Investors should be more concerned if

DWA can make its original contract work (profitably) first. Because DWA

produces content for Netflix, other similar services are less likely to also

hire DWA because of competitive dynamics in the industry. There are

many other small animation studios that produce high quality animated

features (Blue Sky Studios, Illumination Entertainment, ect.)

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Exhibit 1: DreamWorks Annimation Historical Box Offce Results

# Title Release dateProduction

BudgetBox Office

GrossDistributor

TakeMarketing

CostsMarketer

FeesEst. DWA Revenue

DWA Gross Profit

DWA Gross Profit %

1 Antz 10/2/1998 105 175 70 53 14 39 (67) (173%)2 The Prince of Egypt 12/18/1998 70 219 88 35 18 79 9 11%3 The Road to El Dorado 3/31/2000 95 76 30 48 6 (8) (103) 1290%4 Chicken Run 6/23/2000 45 225 90 23 18 95 50 52%5 Shrek 5/18/2001 60 484 194 30 39 222 162 73%6 Spirit: Stallion of the Cimarron 5/24/2002 80 123 49 40 10 24 (56) (234%)7 Sinbad: Legend of the Seven Seas 7/2/2003 60 81 32 30 6 12 (48) (395%)8 Shrek 2 5/19/2004 150 920 368 75 74 403 253 63%9 Shark Tale 10/1/2004 75 367 147 38 29 153 78 51%

10 Madagascar 5/27/2005 75 553 221 38 44 250 175 70%11 Wallace & Gromit: The Curse of the Were-Rabbit 10/7/2005 30 193 77 15 15 85 55 65%12 Over the Hedge 5/19/2006 80 336 134 40 27 135 55 41%13 Flushed Away 11/3/2006 149 178 71 75 14 18 (131) (725%)14 Shrek the Third 5/18/2007 160 799 320 80 64 335 175 52%15 Bee Movie 11/2/2007 150 288 115 75 23 75 (75) (101%)16 Kung Fu Panda 6/6/2008 130 632 253 65 51 264 134 51%17 Madagascar: Escape 2 Africa 11/7/2008 150 604 242 75 48 239 89 37%18 Monsters vs. Aliens 3/27/2009 175 382 153 88 31 111 (64) (57%)19 How to Train Your Dragon 3/26/2010 165 495 198 83 40 175 10 6%20 Shrek Forever After 5/21/2010 165 753 301 83 60 309 144 47%21 Megamind 11/5/2010 130 322 129 65 26 102 (28) (27%)22 Kung Fu Panda 2 5/26/2011 150 665 266 75 53 271 121 45%23 Puss in Boots 10/28/2011 130 555 222 65 44 224 94 42%24 Madagascar 3: Europe's Most Wanted 6/8/2012 145 747 299 73 60 316 171 54%25 Rise of the Guardians 11/21/2012 145 307 123 73 25 87 (58) (66%)26 The Croods 3/22/2013 135 587 235 68 47 238 103 43%27 Turbo 7/17/2013 127 283 113 64 23 84 (43) (52%)28 Mr. Peabody & Sherman 3/7/2014 145 273 109 73 22 69 (76) (109%)29 How to Train Your Dragon 2 6/13/2014 145 619 248 73 50 249 104 42%30 Penguins of Madagascar 11/26/2014 132 373 149 66 30 128 (4) (3%)31 Home 3/27/2015 135 385 154 68 31 133 (2) (2%)

Average 119 419 168 59 34 159 40 25%

Source: film production budgets and Box Office Gross provided by Box Office Mojo. Distributor Take assumed to be 40% of Gross. Marketing costs assumed to be 50% of production budget.Marketer fee assumed to be 8% of Gross. DWA Revenue = Gross - Distributor Take - Marketing Costs - Marketer Fees. DWA Gross Profit = DWA Revenue - Production Budget.

Note: Between 2004 and 2012, DWA's average gross profit per film was 32%. Between 2012 and 2015, DWA average gross profit per film was 2%.

Exhibit 2: Comparable Companies Analysis

Company Name TickerEnterprise Value

Net Debt & NCI Market Cap

NTM Sales Growth

LTM EBITDA Margin

EV / NTM Sales

EV / NTM EBITDA

Price / NTM Earnings

DreamWorks Animation SKG Inc. DWA $2,271.0 $527.1 $1,743.9 23.2% 4.3% 2.4x 40.1x 65.9x

Film Peers

Company Name TickerEnterprise Value

Net Debt & NCI Market Cap

NTM Sales Growth

LTM EBITDA Margin

EV / NTM Sales

EV / NTM EBITDA

Price / NTM Earnings

The Walt Disney Company DIS $187,234.4 $14,786.0 $172,448.4 8.1% 28.9% 3.4x 10.7x 18.8xTime Warner Inc. TWX $80,062.6 $20,672.0 $59,390.6 4.3% 27.8% 2.7x 9.6x 14.3xTwenty-First Century Fox, Inc. FOXA $68,442.8 $12,198.0 $56,244.8 (2.2%) 22.0% 2.4x 9.9x 15.5xViacom, Inc. VIAB $28,662.7 $12,936.0 $15,726.7 2.8% 31.7% 2.1x 6.6x 6.7xAMC Networks Inc. AMCX $8,015.2 $2,747.9 $5,267.3 9.8% 33.2% 3.0x 9.7x 14.0xLions Gate Entertainment Corp. LGF $6,804.7 $1,256.7 $5,548.0 14.1% 10.4% 2.5x 15.7x 19.7xStarz STRZ.A $5,066.8 $1,222.6 $3,844.2 2.2% 29.8% 2.9x 10.1x 14.8x

Mean $54,898.5 $9,402.7 $45,495.7 5.6% 26.3% 2.7x 10.3x 14.8xMedian $28,662.7 $12,198.0 $15,726.7 4.3% 28.9% 2.7x 9.9x 14.8x

TV Peers

Company Name TickerEnterprise Value

Net Debt & NCI Market Cap

NTM Sales Growth

LTM EBITDA Margin

EV / NTM Sales

EV / NTM EBITDA

Price / NTM Earnings

Comcast Corporation CMCS.A $188,046.1 $46,330.0 $141,716.1 3.7% 34.0% 2.6x 7.5x 16.9xThe Walt Disney Company DIS $187,234.4 $14,786.0 $172,448.4 8.1% 28.9% 3.4x 10.7x 18.8xTime Warner Inc. TWX $80,062.6 $20,672.0 $59,390.6 4.3% 27.8% 2.7x 9.6x 14.3xTwenty-First Century Fox, Inc. FOXA $68,442.8 $12,198.0 $56,244.8 (2.2%) 22.0% 2.4x 9.9x 15.5xCBS Corporation CBS $29,606.0 $7,780.0 $21,826.0 4.7% 22.3% 2.1x 8.8x 12.4xViacom, Inc. VIAB $28,662.7 $12,936.0 $15,726.7 2.8% 31.7% 2.1x 6.6x 6.7xDiscovery Communications, Inc. DISC.A $24,634.1 $7,576.0 $17,058.1 3.1% 38.9% 3.7x 9.9x 13.5xScripps Networks Interactive, Inc. SNI $9,427.4 $2,658.4 $6,769.0 20.6% 45.6% 2.9x 7.3x 11.4xAMC Networks Inc. AMCX $8,015.2 $2,747.9 $5,267.3 9.8% 33.2% 3.0x 9.7x 14.0x

Mean $69,347.9 $14,187.1 $55,160.8 6.1% 31.6% 2.8x 8.9x 13.7xMedian $29,606.0 $12,198.0 $21,826.0 4.3% 31.7% 2.7x 9.6x 14.0x

Consumer Products Peers

Company Name TickerEnterprise Value

Net Debt & NCI Market Cap

NTM Sales Growth

LTM EBITDA Margin

EV / NTM Sales

EV / NTM EBITDA

Price / NTM Earnings

The Walt Disney Company DIS $187,234.4 $14,786.0 $172,448.4 8.1% 28.9% 3.4x 10.7x 18.8xHasbro Inc. HAS $10,263.1 $877.9 $9,385.2 5.0% 18.8% 2.3x 11.3x 21.1xMattel, Inc. MAT $9,530.1 $1,799.6 $7,730.5 (2.9%) 15.9% 1.7x 11.2x 16.5x

Mean $69,009.2 $5,821.2 $63,188.0 3.4% 21.2% 2.4x 11.1x 18.8xMedian $10,263.1 $1,799.6 $9,385.2 5.0% 18.8% 2.3x 11.2x 18.8x

Source: Capital IQ. Projections based on Wall Street consensus estimates.

Exhibit 3: DreamWorks Projected Revenue BuildNote: these are my own estimates and do not match Wall St. consensus. Wall St. estimates are slightly higher but within the same general ball park

2011 2012 2013 2014 2015E 2016E 2017E Total Film

# New Films Released 2 2 2 3 1 2 21st Year Average Revenue 72,450 96,250 72,900 51,400 100,000 125,000 90,0002nd Year Average Revenue 74,133 40,150 83,850 63,650 58,333 70,000 97,5003rd Year Average Revenue 2,900 6,850 5,350 15,000 10,000 0

Captain Underpants (March 10, 2017) 90,000 90,000Boss Baby (Jan 13, 2017) 90,000 90,000Trolls (Nov 4, 2016) 50,000 115,000 165,000Kung Fu Panda 3 (Jan 29, 2016) 200,000 80,000 280,000Home (March 27, 2015) 100,000 70,000 170,000The Penguins of Madagascar (Nov 26, 2014) 6,900 50,000 10,000 66,900HTTYD 2 (June 13, 2014) 142,800 75,000 10,000 227,800Mr Peabody & Sherman (March 7, 2014) 4,500 50,000 10,000 64,500Turbo (July 17, 2013) 8,000 51,800 15,000 74,800Croods (March 22, 2013) 137,800 75,500 213,300The Guardians (November 21, 2012) 4,800 76,900 8,900 90,600Madagascar 3 (June 8, 2012) 187,700 90,800 1,800 280,300Puss in Boots (November 4, 2011) 15,800 149,700 13,300 178,800Kung Fu Panda 2 (2011) 129,100 69,400 400 198,900Megamind (2010) 82,400 7,000 89,400Shrek Forever After (2010) 73,700 1,700 75,400How To Train Your Dragon (2010) 66,300 0 66,300Total New Releases 367,300 420,300 327,200 292,200 290,000 350,000 375,000Film Library 184,100 162,400 173,000 161,300 140,000 150,000 160,000Adjustment (to tie out financials) 41 59 (88) (25)Total Film Segment 551,441 582,759 500,112 453,475 430,000 500,000 535,000TV Segment 73,955 75,365 105,950 102,962 200,000 250,000 300,000Consumer Products Segment 43,094 48,674 67,352 64,817 65,000 120,000 140,000New Media Segment 0 0 11,379 49,028 65,000 85,000 110,000Other 37,553 43,044 22,123 14,341 10,000 10,000 10,000Total Company Revenue 706,043 749,842 706,916 684,623 770,000 965,000 1,095,000

Growth % 2011 2012 2013 2014 2015E 2016E 2017E

Total New Releases 14.4% (22.2%) (10.7%) (0.8%) 20.7% 7.1%Film Library (11.8%) 6.5% (6.8%) (13.2%) 7.1% 6.7%Total Film Segment 5.7% (14.2%) (9.3%) (5.2%) 16.3% 7.0%TV Segment 1.9% 40.6% (2.8%) 94.2% 25.0% 20.0%Consumer Products Segment 12.9% 38.4% (3.8%) 0.3% 84.6% 16.7%New Media Segment 330.9% 32.6% 30.8% 29.4%Other 14.6% (48.6%) (35.2%) (30.3%) 0.0% 0.0%Total Company Revenue 6.2% (5.7%) (3.2%) 12.5% 25.3% 13.5%

Exhibit 4: DreamWorks Historical Financials

Income Statement 2011 2012 2013 2014 LTM

Revenues 706,023 749,842 706,916 684,623 752,417Growth % (10.0%) 6.2% (5.7%) (3.2%) 20.9%

Cost of Revenues 480,747 486,634 366,701 372,298 394,461Gross Profit 225,276 263,208 340,215 312,325 357,956

Gross Profit Margin % 31.9% 35.1% 48.1% 45.6% 47.6%Selling and Marketing 0 35,230 39,424 61,252 62,260General and Administrative 84,253 113,006 166,100 188,089 204,465

SG&A % of Sales 11.9% 19.8% 29.1% 36.4% 35.4%Product Development 2,864 4,891 3,347 5,217 5,990Stock Based Comp 28,301 17,044 18,531 19,302 21,608EBIT 109,858 93,037 112,813 38,465 63,633

EBIT Margin % 15.6% 12.4% 16.0% 5.6% 8.5%D&A 3,304 6,347 14,934 21,035 40,256

D&A % of Sales 0.5% 0.8% 2.1% 3.1% 5.4%Adj. EBITDA 113,162 99,384 127,747 59,500 103,889

Adj. EBITDA Margin % 16.0% 13.3% 18.1% 8.7% 13.8%Mgmt. Adj. EBITDA (add SBC) 141,463 116,428 144,778 95,302 137,377Net Interest (643) (481) 57 11,866 21,507Contributions to ODK 0 0 (14,709) (8,429) (8,440)Loss from Equity Investments 0 0 6,891 13,808 16,218Income Tax Benefit (5,522) (2,565) 675 (253,861) (244,118)Δ in FV of Contingent Consideration 0 0 1,500 (16,500) (11,780)Other Expenses (7,150) (8,280) (6,187) 14,361 20,897Impairments & Write-offs 0 158,000 49,682 153,363 105,2892015 Restructuring Program 0 0 0 210,074 262,834EBT 123,173 (53,637) 74,904 (86,217) (98,774)Taxes 36,372 (17,215) 19,181 222,104 246,132Tax Rate 29.5% 32.1% 25.6% (257.6%) (249.2%)Minority Interest (After Tax) 0 0 639 1,293 (255)Net Income (Loss) 86,801 (36,422) 55,084 (309,614) (344,651)

Balance Sheet 2011 2012 2013 2014 6/30/15

Cash and Equivalents 116,093 59,246 95,467 34,227 122,202Accounts Receivable 72,456 109,102 130,744 160,585 176,201Receivable from Distributors 214,647 266,185 283,226 271,256 216,151Incomes Taxes Receivable 3,960 0 0 0 0Prepaid Expenses 20,842 18,593 20,555 17,555 43,492Restricted Cash 0 0 244 25,244 7,991Total Current Assets 427,998 453,126 530,236 508,867 566,037PP&E 172,511 188,986 186,670 180,607 148,768Equity Investments 0 9,782 38,542 35,330 27,426Deferred Taxes-net 248,519 238,007 221,920 0 0Goodwill 34,216 71,406 179,722 189,667 190,668Intangible Assets 0 148,234 150,511 185,941 179,341Film and Other Inventory 882,646 820,482 943,486 827,890 847,379Other Assets 13,023 14,869 23,141 40,408 51,391Total Assets 1,778,913 1,944,892 2,274,228 1,968,710 2,011,010

Accounts Payable 3,283 6,611 5,807 9,031 16,640Accrued Liabilities 105,505 123,886 263,668 189,222 161,133Total Current Liabilities 108,788 130,497 269,475 198,253 177,773Deferred Taxes-net 0 0 0 16,709 17,976Minority Interest 0 630 1,224 38,041 50,659Deferred Revenue 19,032 25,517 36,425 33,895 80,075Payable to Former Stockholder 294,397 277,632 262,309 10,455 10,224Lease Financing Obligations 0 0 0 0 183,601Revolving Credit Facility 0 165,000 0 215,000 115,000Senior Unsecured Notes 0 0 300,000 300,000 300,000Total Liabilities 422,217 599,276 869,433 812,353 935,308

Common Stock & APIC 1,024,496 1,058,557 1,101,221 1,173,941 1,189,670Treasury Stock - Common (720,495) (730,568) (768,224) (778,541) (781,607)Retained Earnings & AOCI 1,052,695 1,017,627 1,071,798 760,957 667,639Total Shareholders Equity 1,356,696 1,345,616 1,404,795 1,156,357 1,075,702Total Liabilities & Equity 1,778,913 1,944,892 2,274,228 1,968,710 2,011,010

Cash Flows 2011 2012 2013 2014 LTM

Net Income 86,801 (36,422) 55,723 (308,321) (344,906)Depreciation and Amortization 3,304 4,158 4,459 6,491 25,099Amortization of Intangible Assets 0 2,189 10,475 14,544 15,157Amortization and Write-off 388,169 567,936 360,480 625,567 601,313Amortization of Financing Costs 288 651 338 1,173 1,823Gain on Sale 0 0 (6,377) 0 0Other Impairment and Write Offs 0 0 650 19,591 24,655Loss from Equity Method Investees 0 0 6,891 13,808 16,218Stock Compensation 28,301 17,044 18,531 19,302 21,608Deferred Taxes, Net 44,749 (18,408) 20,394 222,066 249,923Intangible Assets 0 0 1,021 0 0Δ in FV of Contingent Consideration 0 0 1,500 (16,500) (11,780)Equity Income 0 0 (16,145) (8,429) (8,440)Trade Accounts Receivables (26,360) (28,502) (26,094) (20,866) (24,164)Film Inventories (454,704) (449,974) (440,416) (484,285) (427,700)A/P and Accrued Expenses (38,724) 5,647 44,975 22,627 37,193Income Taxes (4,356) 111 449 (836) (8,082)Advances and Unearned Revenue 101,264 93,339 127,980 97,041 134,610Revenue Earned Against Deferred (85,855) (74,197) (95,631) (65,193) (68,217)Prepaid Expense and Other Assets (2,165) (3,305) (9,459) (32,827) (56,071)Restricted Cash 0 0 0 (25,000) (7,748)Payable to Former Stockholder (35,192) (16,765) (15,322) (251,854) (251,470)Distributor receivable/payable 27,982 (35,105) (17,430) 9,456 (7,690)Cash Flow from Operating 33,502 28,397 26,992 (162,445) (88,669)

Purchase of PP&E (43,239) (61,734) (39,385) (34,358) (21,300)Acquisitions, Net of Cash Acquired 0 (157,550) (32,120) (12,605) 0Proceeds from Sale 0 0 6,409 0 0Character and Dist. Acquisiton 0 (11,900) 0 (51,000) 0Investment in Affiliates (5,000) (3,000) (19,451) (20,645) (9,578)Cash Flow from Investing (48,239) (234,184) (84,547) (118,608) (30,878)

Borrowings from Credit Facility 0 200,000 68,000 250,000 525,405Repayment of Credit Facility 0 (35,000) (233,000) (35,000) (510,405)Borrowings Sr. Unsecured Notes 0 0 300,000 0 0Payment on Capital Lease 0 0 0 0 (1,399)Proceeds from Stock Options 8 0 6,886 12,167 11,906Purchase of Treasury Stock (32,171) (10,035) (37,656) (10,545) (11,655)Excess Tax Benefits from SBC 103 863 0 0 0Deferred Financing Costs (338) (5,297) (7,732) 0 (6,286)Contingent Consideration Payment 0 0 0 (79,665) (80,000)Sale of Equity Interest 0 0 0 81,250 81,250Sale-Leaseback Financing 0 0 0 0 185,000Capital Contributions from Affiliate 0 0 0 0 15,000Distributions to Affiliate 0 0 0 0 (813)Cash Flow from Financing (32,398) 150,531 96,498 218,207 208,003

FX (591) (1,591) (2,722) 1,606 1,550Cash Flow Net Changes in Cash (47,726) (56,847) 36,221 (61,240) 90,006