Investors in DreamWorks Animation SKG Inc. had reason to celebrate after the Glendale-based film studio announced better-than-expected second-quarter profit late Thursday.
But the champagne quickly ran out Friday. After months of declining share prices, the company's financial results pushed DreamWorks' stock up only 1.5% to $20.61 a share. Analysts and company executives expect the shares to continue to struggle over the coming weeks, regardless of how well DreamWorks performs.
Blame it on Paul Allen, the company's largest shareholder. Under DreamWorks' unusual ownership structure, Allen has the right to force the company to sell more than $300 million worth of shares to the public in the next three months, according to analyst estimates.
It stems from a corporate structure designed to make sure that DreamWorks' original investors were paid back, including Microsoft Corp. billionaire Allen, who put up an estimated $707 million.
The possibility of such a sale has contributed to DreamWorks' flagging stock, which hit a record low Thursday before the earnings report and is down 51% from its peak in 2004. Flooding the market with new shares would probably depress the stock even more.
"Our stock price has not caught up yet with our performance, and the possibility of a secondary offering is contributing to that," DreamWorks Chief Executive Jeffrey Katzenberg said in an interview. "Anytime you have something like that hanging over a stock, it's going to contribute to how investors see a company."
However, the company would not say much more than that. When asked during its earnings conference call Thursday whether Allen had demanded the stock offering, DreamWorks President Lewis Coleman said: "We don't believe that Paul's request to trigger requires disclosure.... I cannot comment."
Some analysts say that's not what shareholders want to hear.
"It's never a good thing when any executive says 'we don't think we have to answer you,' " said Anthony Valencia, who follows DreamWorks for money manager TCW Group. "It's dangerous to create an impression that executives aren't sharing bad news."
By Friday morning, the analyst who probed Coleman about Allen's intentions -- Richard Greenfield of Pali Research -- released a note suggesting that Allen had already informed DreamWorks that he intended to force the sale of 16 million of the estimated 50 million DreamWorks shares held by a holding company known as Holdco.
