DreamWorks IPO Opens On Wall St.

It's shaping up to be an ogre-sized debut for shares of the company that made the animated hits "Shrek" and "Shark Tale."

Shares of DreamWorks Animation Inc. are scheduled to begin trading Thursday and were priced Wednesday night at $28 per share - higher than the $23 to $25 per share target in the company's prospectus.

At that price, DreamWorks will raise $812 million from the 29 million shares it will make available in its initial public offering. The company said it would give its underwriters a 30-day option to purchase up to an additional 4.35 million shares of common stock to cover any over-allotments.

The company is spinning off from its parent, DreamWorks SKG, formed 10 years ago by Jeffrey Katzenberg, Steven Spielberg and David Geffen. The company, which will trade under the ticker symbol "DWA" on the New York Stock Exchange, is generating tremendous buzz in a rather tepid stock market in part because it is the first entertainment IPO to be offered in years.

But long term, DreamWorks must prove it can deliver consistent hits other than its popular "Shrek" series. It also faces considerable competition from rival Pixar Animation Studios and other companies, including The Walt Disney Co. and Twentieth Century Fox, which are making computer-animated features.

After the IPO, Katzenberg and Geffen will have 93 percent voting control of the company, leaving individual investors with almost no voice regardless of how many shares they own.

And insiders, such as Spielberg and early DreamWorks backer Paul Allen, can begin selling their shares after six months, creating potential downward pressure on the stock. Allen is believed to want a return on the more than $500 million he has already sunk into the company.

DreamWorks Animation will also be carrying a lot of debt and will have to find financing to support its ambitious slate of two features per year.

But the near future looks bright for DreamWorks Animation, which is slated to release two films next year, the computer-animated "Madagascar" and the stop-action "Wallace & Grommit" movie. The company is also planning "Shrek 3" for 2006.

"What they are doing is taking advantage of their success with "Shrek 2" in theaters, but in addition, they will have the "Shrek 2" DVD coming out in November," said Harold Vogel, a financial analyst with Vogel Capital Management.

The DVD of "Shark Tale" will hit stores early next year, giving the company another financial boost.

"You have two very good quarters ahead of you after the IPO, which is nice to have," Vogel said.

Shares of the company could rise to slightly higher than $30 per share in 2007 based on its planned film slate and the home video revenue of "Shrek 3," Richard Greenfield of Fulcrum Global Partners, wrote in a recent note.

"Despite our concerns surrounding DWA's creative volatility (vs. the sustained, but 'hard to believe' creative perfection of Pixar) and the threat of continued insider selling, we believe DWA's $2.5 billion valuation at the $24 midpoint of the IPO range is attractive...," he wrote.

But DreamWorks has had its share of flops in the past, including last year's hand-drawn feature "Sinbad: Legend of the Seven Seas."

And its first animated television series, "Father of the Pride," has received lukewarm ratings on NBC.

And then there is Pixar.

The studio has never had a flop and its latest film, "The Incredibles," will be released next week by Disney.

"Pixar is the gold standard by which everything is judged in this industry," Vogel said.

Pixar has one more film to deliver under its current contract with Disney, which keeps more than 60 percent of the box office receipts. Starting in 2006, Pixar will own 100 percent of its movies, which will significantly boost its profits, assuming the company's perfect track record of producing hits remains intact.

In trading Wednesday, shares of Pixar closed up $2.86, or 3.7 percent, at $79.82 on the Nasdaq Stock Market.

By Gary Gentile