Thursday, December 15, 2005
By Nick Wingfield and Merissa Marr, The Wall Street Journal
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As the courtship between Pixar Animation Studios and Walt Disney Co. drags on, some investors and analysts have started wondering whether a future partnership could be deeper than a straightforward distribution deal for Pixar's movies.
For months, the companies have been in talks about continuing one of the most successful partnerships in the entertainment industry, which dates back to 1995's "Toy Story," the pioneering computer-animated movie that was the first of six major hits created by Pixar. Under the current deal that expires with next June's "Cars," Disney co-finances Pixar's movies, and the companies equally split film profits after Disney takes a distribution fee and is compensated for marketing and other costs.
Having established a stellar track record, Pixar has been seeking a more lucrative deal that would involve Pixar picking up all the production costs of its movies and simply paying Disney a distribution fee.
There is another, more fanciful, theory buoying Pixar's share price, though: Disney could buy Pixar and make it, in effect, Disney's animated-film division. That idea has been floated in recent research reports, including several by Credit Suisse First Boston analyst William Drewry, who doesn't own any Pixar shares and has an outperform rating on the stock. Mr. Drewry further speculated that Pixar's chief executive, Steve Jobs, could become a member of the Disney board and a significant shareholder in the media giant. CSFB has provided investment-banking services to Pixar of Emeryville, Calif.
According to people familiar with the talks, Pixar and Disney of Burbank, Calif., are still toying with a broad range of options. For instance, these people say, one idea that has been kicked around by the companies is that Pixar could sell Disney a minority stake or give Disney a participation in the performance of its movies in exchange for sequel rights to Pixar's existing library of films, including "Finding Nemo" and "The Incredibles." It has long irked Mr. Jobs that Disney controls the sequel rights to his movies. However, such an option would be complex to pull off.
A Pixar spokesman and a Disney spokeswoman declined to comment.
In a recent interview, Disney Chief Executive Robert Iger said that "I've concluded that for the company to be successful long-term creatively, it must get animation right. That does guide a bit of what we end up doing with Pixar but it's not fully determinate. ... The nature of the deal is what is most important, it's not whether there is a deal or not."
Messrs. Jobs and Iger have sidestepped questions about a possible acquisition in recent conference calls with investors and analysts, further fueling chatter about such an option. Analysts estimate such talk has boosted Pixar's stock by several dollars -- a so-called takeover premium that could evaporate if the two end up not tying the knot. Pixar's shares rose 8 percent the day after CSFB's Mr. Drewry issued a report Oct. 6 titled "What if Disney Buys Pixar?" and the company's shares are up more than 22 percent since that date.
In 4 p.m. composite trading Wednesday on the Nasdaq Stock Market, Pixar's shares were down 62 cents to $54.72, giving the company a market capitalization of about $6.5 billion. On the New York Stock Exchange, Disney, with a market value of about $51 billion, fell 13 cents to $25.
In a research report following Disney's recent fourth-quarter earnings, Prudential Equity Group analyst Katherine Styponias noted that Mr. Iger said Disney's top priority is animation. "Although very little color and commentary was given on the Pixar discussions, we felt that the potential for an outright purchase of Pixar is not out of the realm of possibilities based on management's tone and comments," Ms. Styponias said in her report. She has an overweight rating on Pixar and doesn't own any Pixar stock. Prudential doesn't do any business with the animation company.
Such an outcome seems like a long shot to some investors. "I think they feel their process is very different from Disney's and they wouldn't want to risk losing control over that," says Anthony Valencia, a media and entertainment analyst for the TCW Group Inc., an investment firm with $118 billion under management that is the second-largest shareholder in Pixar, after Mr. Jobs. Mr. Valencia, who doesn't have ratings on any stocks, doubts that an acquisition of Pixar makes sense, but adds: "Obviously, Jobs has some duty to shareholders -- there might be some price he couldn't turn down."
Kevin Landis, chief investment officer at Firsthand Funds in San Jose, Calif., with about $700 million in assets, echoed the view that Mr. Jobs is unlikely to relinquish the autonomy that has helped Pixar thrive. From its perch in the San Francisco Bay area, hundreds of miles from Hollywood, Pixar has stuck to the leisurely pace of releasing a new film about every 18 months, while competitors are pumping out multiple computer-animated movies a year. Pixar has said it aims to step up its production to one movie a year. But investors believe any change in ownership could force Pixar to speed up its creative output even more.
"In buying it, there's the risk you destroy what makes it special," says Mr. Landis, who estimates the fund holds about 200,000 Pixar shares. "There's no one there who needs to cash out."
Price, too, is another big potential stumbling block. Pixar shares, adjusted for a 2-for-1 stock split in April, are up 28 percent for the year, and the company's market value is prohibitively high for Disney, some analysts think.
Indeed, the gap between the market value of Pixar and its nearest rival, DreamWorks Animation SKG Inc., has reached a high. DreamWorks has a market value of about $2.6 billion. Part of the difference can be attributed to factors such as DreamWorks's recent problems with its "Shrek 2" DVD, but the contrast is still striking when considering that DreamWorks's two-movies-a-year release schedule gave it revenue last year of more than $1 billion, almost four times that of Pixar. The price-to-earnings ratio of Pixar, based on projected earnings for this year, is 46, considerably richer than the P/E multiple of 30 for DreamWorks, according to Thomson Financial.
Mr. Jobs began negotiating a new deal with Disney's former CEO Michael Eisner nearly two years ago, but the talks between the two executives, who had a rancorous relationship, collapsed after Mr. Jobs publicly halted the negotiations early last year.
When Mr. Eisner handed the CEO reins to his more conciliatory deputy, Mr. Iger, this year, many saw an opportunity to revive the discussions. Indeed, one of Mr. Iger's first moves as CEO was to reach out to Mr. Jobs, and the two companies have been in talks since. The two executives even struck a deal for Mr. Jobs's other company, Apple Computer Inc., to sell Disney-produced television shows, such as "Desperate Housewives," over the Internet.
Yet the Pixar-Disney discussions are taking longer than both sides expected. In a recent conference call with analysts, Mr. Jobs said he would like to reach an agreement with Disney by year end, but he said the conversations are taking longer than expected. People familiar with the talks say the two sides are still some distance apart on any agreement, and there is a strong chance the negotiations will push into next year.
By Nick Wingfield and Merissa Marr, The Wall Street Journal
<!-- BODY START -->
As the courtship between Pixar Animation Studios and Walt Disney Co. drags on, some investors and analysts have started wondering whether a future partnership could be deeper than a straightforward distribution deal for Pixar's movies.
For months, the companies have been in talks about continuing one of the most successful partnerships in the entertainment industry, which dates back to 1995's "Toy Story," the pioneering computer-animated movie that was the first of six major hits created by Pixar. Under the current deal that expires with next June's "Cars," Disney co-finances Pixar's movies, and the companies equally split film profits after Disney takes a distribution fee and is compensated for marketing and other costs.
Having established a stellar track record, Pixar has been seeking a more lucrative deal that would involve Pixar picking up all the production costs of its movies and simply paying Disney a distribution fee.
There is another, more fanciful, theory buoying Pixar's share price, though: Disney could buy Pixar and make it, in effect, Disney's animated-film division. That idea has been floated in recent research reports, including several by Credit Suisse First Boston analyst William Drewry, who doesn't own any Pixar shares and has an outperform rating on the stock. Mr. Drewry further speculated that Pixar's chief executive, Steve Jobs, could become a member of the Disney board and a significant shareholder in the media giant. CSFB has provided investment-banking services to Pixar of Emeryville, Calif.
According to people familiar with the talks, Pixar and Disney of Burbank, Calif., are still toying with a broad range of options. For instance, these people say, one idea that has been kicked around by the companies is that Pixar could sell Disney a minority stake or give Disney a participation in the performance of its movies in exchange for sequel rights to Pixar's existing library of films, including "Finding Nemo" and "The Incredibles." It has long irked Mr. Jobs that Disney controls the sequel rights to his movies. However, such an option would be complex to pull off.
A Pixar spokesman and a Disney spokeswoman declined to comment.
In a recent interview, Disney Chief Executive Robert Iger said that "I've concluded that for the company to be successful long-term creatively, it must get animation right. That does guide a bit of what we end up doing with Pixar but it's not fully determinate. ... The nature of the deal is what is most important, it's not whether there is a deal or not."
Messrs. Jobs and Iger have sidestepped questions about a possible acquisition in recent conference calls with investors and analysts, further fueling chatter about such an option. Analysts estimate such talk has boosted Pixar's stock by several dollars -- a so-called takeover premium that could evaporate if the two end up not tying the knot. Pixar's shares rose 8 percent the day after CSFB's Mr. Drewry issued a report Oct. 6 titled "What if Disney Buys Pixar?" and the company's shares are up more than 22 percent since that date.
In 4 p.m. composite trading Wednesday on the Nasdaq Stock Market, Pixar's shares were down 62 cents to $54.72, giving the company a market capitalization of about $6.5 billion. On the New York Stock Exchange, Disney, with a market value of about $51 billion, fell 13 cents to $25.
In a research report following Disney's recent fourth-quarter earnings, Prudential Equity Group analyst Katherine Styponias noted that Mr. Iger said Disney's top priority is animation. "Although very little color and commentary was given on the Pixar discussions, we felt that the potential for an outright purchase of Pixar is not out of the realm of possibilities based on management's tone and comments," Ms. Styponias said in her report. She has an overweight rating on Pixar and doesn't own any Pixar stock. Prudential doesn't do any business with the animation company.
Such an outcome seems like a long shot to some investors. "I think they feel their process is very different from Disney's and they wouldn't want to risk losing control over that," says Anthony Valencia, a media and entertainment analyst for the TCW Group Inc., an investment firm with $118 billion under management that is the second-largest shareholder in Pixar, after Mr. Jobs. Mr. Valencia, who doesn't have ratings on any stocks, doubts that an acquisition of Pixar makes sense, but adds: "Obviously, Jobs has some duty to shareholders -- there might be some price he couldn't turn down."
Kevin Landis, chief investment officer at Firsthand Funds in San Jose, Calif., with about $700 million in assets, echoed the view that Mr. Jobs is unlikely to relinquish the autonomy that has helped Pixar thrive. From its perch in the San Francisco Bay area, hundreds of miles from Hollywood, Pixar has stuck to the leisurely pace of releasing a new film about every 18 months, while competitors are pumping out multiple computer-animated movies a year. Pixar has said it aims to step up its production to one movie a year. But investors believe any change in ownership could force Pixar to speed up its creative output even more.
"In buying it, there's the risk you destroy what makes it special," says Mr. Landis, who estimates the fund holds about 200,000 Pixar shares. "There's no one there who needs to cash out."
Price, too, is another big potential stumbling block. Pixar shares, adjusted for a 2-for-1 stock split in April, are up 28 percent for the year, and the company's market value is prohibitively high for Disney, some analysts think.
Indeed, the gap between the market value of Pixar and its nearest rival, DreamWorks Animation SKG Inc., has reached a high. DreamWorks has a market value of about $2.6 billion. Part of the difference can be attributed to factors such as DreamWorks's recent problems with its "Shrek 2" DVD, but the contrast is still striking when considering that DreamWorks's two-movies-a-year release schedule gave it revenue last year of more than $1 billion, almost four times that of Pixar. The price-to-earnings ratio of Pixar, based on projected earnings for this year, is 46, considerably richer than the P/E multiple of 30 for DreamWorks, according to Thomson Financial.
Mr. Jobs began negotiating a new deal with Disney's former CEO Michael Eisner nearly two years ago, but the talks between the two executives, who had a rancorous relationship, collapsed after Mr. Jobs publicly halted the negotiations early last year.
When Mr. Eisner handed the CEO reins to his more conciliatory deputy, Mr. Iger, this year, many saw an opportunity to revive the discussions. Indeed, one of Mr. Iger's first moves as CEO was to reach out to Mr. Jobs, and the two companies have been in talks since. The two executives even struck a deal for Mr. Jobs's other company, Apple Computer Inc., to sell Disney-produced television shows, such as "Desperate Housewives," over the Internet.
Yet the Pixar-Disney discussions are taking longer than both sides expected. In a recent conference call with analysts, Mr. Jobs said he would like to reach an agreement with Disney by year end, but he said the conversations are taking longer than expected. People familiar with the talks say the two sides are still some distance apart on any agreement, and there is a strong chance the negotiations will push into next year.