DreamWorks Animation SKG, Inc. (DWA)
Owner-Operator: Jeffrey Katzenberg
DreamWorks Animation SKG, Inc. (named for its founders: Steven Spielberg, Jeffrey Katzenberg, and David Geffen) is a developer of original animated content. Titles include the Shrek, Madagascar, and How to Train Your Dragon franchises, among many others. Despite the significant value of its content library, the company has historically traded in response to the box office receipts of its most recent theatrical releases. This was true despite the fact that the company’s content has the potential to generate revenue well after its theater run is over, with virtually no additional costs incurred (i.e., high-margin, recurring revenue). Over the past several years, the company has sought to diversify its revenue stream and monetize its content library, with the effect of reducing the impact of recent releases on near-term results. Mr. Katzenberg has sought to achieve this by striking joint venture agreements with amusement parks, as well as by licensing its characters for various purposes, including television series development. The company has long been considered a potential acquisition target, but previously rumored deals failed to come to fruition. On April 28, 2016, Comcast Corp. announced that its NBCUniversal division would buy DreamWorks Animation for approximately $3.8 billion, resulting in a return of approximately 64% during the quarter and an annualized return of approximately 17% over the last three years. DreamWorks Animation stockholders will receive $41 per share in cash. The transaction is expected to be completed by the end of 2016. The company has since been removed from the Fund, as its acquisition is pending.
Hertz Global Holdings, Inc. (HTZ) & Herc Holdings Inc. (HRI)
Owner-Operator: Carl Icahn
On June 30, 2016, Hertz Global Holdings, Inc. completed the separation of its equipment rental business from its car rental operations. The separation was effected via a tax-free distribution of shares of the car rental operations as Hertz Global Holdings, Inc., with the equipment rental business remaining with the parent company and renamed Herc Holdings Inc. Carl Icahn is a significant owner of both companies.
Hertz Global Holdings, Inc. is the operator of the Hertz, Dollar, Thrifty, and Firefly global car rental brands. Though increased air travel and business spending have traditionally acted as positives for the rental car industry, new disruptive entrants into the market have the potential to slow revenue growth for Hertz. That said, the spin-off transaction should allow for both margin and multiple expansion, as its operations are now better positioned to engage in necessary cost cutting and are separated from the lower-multiple equipment rental business. In fact, the company recently reiterated a goal of achieving $350 million in savings during 2016, which should allow for margin expansion despite a challenging revenue environment. In addition, Hertz received $2 billion in proceeds from the spin-off transaction, a portion of which will be used to pay down debt. Furthermore, on the same day that the spin-off was completed, Hertz announced U.S. supply agreements with both Lyft and Uber; whereunder, Hertz will begin renting cars to those companies in specific markets. These agreements allow Hertz to utilize cars that are rotating out of their consumer rental fleet by providing them to Lyft and Uber for their rideshare businesses, thereby, gaining some exposure to this expanding business model.
Herc’s equipment rental business generates revenue from equipment rental, equipment re-rental, sale of used rental equipment, sale of new equipment, parts and supplies, and service and support. Equipment rental uses include aerial (e.g., bucket trucks, boom lifts, among others), earth-moving, and material handling, among a variety of other purposes. Following declines in equipment rental revenue post-2008, the industry has rebounded, experiencing positive growth over the past four years. Management expects the equipment rental industry to grow at an annualized rate of 5.8% through 2019. The industry also appears to have entered a consolidation phase. Herc has completed 11 acquisitions since 2009 in a variety of specialty rental markets, thereby broadening its industrial market exposure and allowing the company to expand into adjacent end-markets. The equipment rental business also appears compelling given Herc’s significant industry presence and macro tailwinds (e.g., increasing levels of construction, etc.), which should aid the company in growing earnings and cash flow, as well as allowing for debt retirement and/or acquisitions. Separately, over a longer time frame, it appears reasonable to suspect that a larger competitor may be interested in acquiring Herc’s assets.