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No Green Light for Warner Bros. from Abu Dhabi

Eighteen months ago, when Hollywood was beating a path to the Middle East in search of investors, Warner Bros. thought it had struck oil. In September 2007, the studio signed a deal with companies owned by the Abu Dhabi government for what was later pegged at $1 billion to build a theme park and movie theaters and finance films together. Today the largest part of that deal—$500 million to jointly fund movie projects—has stalled.

Sources in Hollywood and the financial industry say that Abu Dhabi Media and the Time Warner-owned (TWX) studio are in talks to restructure their agreement but are not close to a resolution. The only movie Abu Dhabi has invested in under the deal is Shorts, a family film starring Jon Cryer and William H. Macy that is scheduled for release this summer. That movie was put into production shortly after the financing deal was announced. According to sources, the two sides haven't discussed new film projects in months.

Although unlikely at this point, Abu Dhabi could walk away from the film portion of the deal. "In light of the current economic climate, we are working with our partners in Abu Dhabi to ensure each company's business objectives are mutually aligned," Warner Bros. said in a statement. Officials from Abu Dhabi Media did not return phone calls or e-mails.

Studios are under pressure now

A revamping of the lucrative financial deal couldn't come at a more awkward time for Warner Bros. Last week the studio was the center of Hollywood buzz concerning its two top executives, Chairman Barry Meyer and President Alan Horn. The pair signed two-year extensions of their contracts, setting off speculation about succession and whether new executives might revamp the studio operation as Time Warner CEO Jeff Bewkes has done at other units within the company. Bewkes praised Meyer and Horn in a Los Angeles Times article, saying the two executives are "at the top of their game."

A possible reduction in the $500 million financing—or its outright cancellation—would come just as the industry is facing tough challenges that include a prolonged slowdown in the lucrative DVD market. Under the deal, announced on Sept. 26, 2007, Abu Dhabi and Warner agreed to split 50-50 the financing of films, with Time Warner retaining its rights to a generous distribution fee. The films receiving funds were to be "mutually agreed upon," but sources say Warner had placed off limits its successful Harry Potter franchise. A separate deal would have allowed the two sides to invest in a slate of Arabic-language films, but that pact has seemingly stalled as well.

There are differing accounts as to what went wrong with the film deal. One source with knowledge of the ongoing talks says that because oil prices have fallen sharply in the last few months, Abu Dhabi is slashing capital-intensive projects and considers film production "low on the totem pole." Another source, however, says Abu Dhabi was concerned that it wasn't getting access to the best Warner Bros. projects, which were being offered first to some of the studio's long-standing financial partners, private equity firm Legendary Pictures and Australian film production company Village Roadshow.

Some non-movie projects have moved forward. Abu Dhabi, for instance, has invested in four video games, including one based on this year's film Watchmen. The two sides are building a pair of multiplex theaters they will jointly operate when opened in 2011. Two other movie complexes are currently being designed. But a hotel and theme park—which Warner Bros. plans to license to the Abu Dhabi-owned ALDAR real estate development firm—is being redesigned and won't break ground this year as planned.

Grover is Los Angeles bureau chief for BusinessWeek.

Grover covers the media and entertainment industry for Bloomberg Businessweek in Los Angeles.

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