By Lisa Richwine
LOS ANGELES (Reuters) - DreamWorks Animation SKG Inc could soon have a new Japanese owner in a deal that highlights the challenges facing Hollywood's smaller studios in remaining independent and could prompt a string of other deals.
Over the weekend, a source said DreamWorks, the studio best known for movie franchises including "Shrek" and "Madagascar," was in talks about a possible sale to SoftBank Corp, the cash-rich Japanese communications and media company.
The development could make other independent studios the targets of larger players, or prompt them to seek outside buyers or investors.
Many smaller, independent studios produce only a handful of movies each year, making them especially vulnerable to box office disappointments, such as those that DreamWorks has produced lately with "Rise of the Guardians," "Mr. Peabody & Sherman" and "Turbo." And they don't have the other businesses like cable channels or theme parks to help ride out film flops.
Movie studios have also faced a decline in DVD sales and increased competition from digital entertainment options like Netflix Inc.
The industrywide challenges make it harder for smaller studios without partnerships to tap the cash and distribution networks of larger companies, said Hal Vogel, the chief executive officer of Vogel Capital Management and an entertainment industry analyst.
"The movie business is capital intensive," he said. "You need a lot of cash just to stay in business."
Independent studios that are currently riding hot streaks could become targets for purchase or investment from larger media companies - some of them China-based - that want to acquire proven content.
"Other mid-tier Hollywood studios could become targets," B. Riley analyst Eric Wold wrote in a research note. "While any studio could be a target, we actually believe mid-tier standalone Hollywood studios that do not have a number of other divisions or businesses that could prove to be distractions or need to be divested would likely be preferred."
"Hunger Games" producer Lions Gate Entertainment Corp, the largest independent studio with more than a dozen films already released this year, could draw interest, Wold said, echoing other analysts.
Although analysts have mentioned China as a key source of potential buyers, French media group Vivendi SA may also be looking at a deal with Lions Gate as it seeks to bolster its own content offerings, sources have said.
Lions Gate shares were up 4 percent to $32.43 at midday, while DreamWorks surged 25 percent to $28.01.
A Lions Gate spokesman declined to comment.
Speculation about smaller content providers being targets was recently fueled by Twenty-First Century Fox Inc's attempt to acquire Time Warner Inc - both own movie studios - although Fox has dropped its pursuit for now.
Another company, MGM, the storied studio with the roaring lion logo, has found success co-financing the James Bond and "Hobbit" franchises after it emerged from bankruptcy in 2010.
Investors in MGM are waiting to see if the company will seek an initial public offering or a sale to a media conglomerate that wants to expand its television and movie properties and acquire its film library.
Both Lions Gate and MGM also produce television shows.
Reports of Softbank's interest in DreamWorks highlight the value of content to media players, said Steven Azarbad, chief investment officer of Maglan Capital, which owns about 1 percent of MGM.
"There aren't too many assets left with the scale of MGM Studios that can be acquired," he said.
An MGM spokeswoman declined to comment.
As for DreamWorks, which has recently stumbled after churning out hits including "Madagascar" and "Kung Fu Panda," an investment from or buyout by an Asian player like SoftBank could be a shot in the arm in a year when its shares have tumbled 37 percent through Friday.
(Additional reporting by Liana Baker; Editing by Christian Plumb, Eric Effron and Jeffrey Benkoe)