A Dream Deal for Dreamworks?

Rumors and denials aside, here's why this hot studio likely will play a key role in the bidding war for Vivendi's media assets

By Ronald Grover

The cast of that Hollywood extravaganza called Buying Vivendi Universal Entertainment just keeps getting larger. On May 21, former Seagram CEO Edgar Bronfman Jr. said he wants to buy back VUE, which includes the Universal movie studio and theme parks, MCA Records, and a bunch of cable channels three years after he sold it all to French utility Vivendi (V ). So Bronfman is now up against the likes of Liberty Media L ) dealmaking whirlwind John Malone, USA Interactive (USAI ) Chairman Barry Diller, Los Angeles billionaire Marvin Davis, and -- hold on now -- MGM (MGM ), NBC, and Viacom (VIA ).

The surprise is that, despite its denials, little ol' Dreamworks could steal the show. That's the studio started in 1994 by Hollywood heavyweights David Geffen, Steven Spielberg, and Jeffrey Katzenberg. For months, rumors have circulated that somehow Dreamworks would be a part of whatever deal is made for the French-owned assets. And on May 15, Malone for the first time put the notion in the public that maybe he would buy Vivendi's studio and theme parks and let Dreamworks run it for him.

"Would I like to put money behind Jeffrey Katzenberg? You bet," Malone told investors about such a possible deal. "Is that opportunity going to present itself? I don't know, but it has been thought of, yes."


  Malone never says things idly. And he desperately wants to buy something -- anything, it seems -- to expand his company. Plus, he has the balance sheet to do it, with nearly $4 billion in cash and $5 billion more that he has put into "collars" to guard against the decline in various Liberty stock holdings. That, as Malone none too modestly points out, is a lot of "firepower."

And Malone knows that Dreamworks would give him immediate cachet with the French, so you can bet he intends to make a bid for Vivendi in June, when the bids are expected to start formally being collected. (No figure has been placed on a possible deal between a Malone-owned VUE and Dreamworks, as Dreamworks is privately held.)

The trio at Dreamworks say they haven't been asked and frankly are wondering what has gotten into the good Mr. Malone. "It's flattering," says Dreamworks marketing head Terry Press of the buzz. "It would've been nice to have had a conversation with him before he said anything."


  According to those close to Dreamworks, Geffen, the company's top dealmaker, hasn't talked to Malone or anyone in the mogul's camp for months. Katzenberg, say sources, hasn't talked to Malone since last summer, at Hebert Allen's annual media schmoozefest in Sun Valley. And no one -- not then, not now -- from the Malone side has mentioned bringing in Dreamworks or Katzenberg to run anything, these sources say.

So, why does this rumor have legs? Because a merger of Dreamworks and Vivendi Universal makes too much sense for savvy dealmakers like Malone and Geffen to ignore. Dreamworks is a hit factory -- in the last three years alone it made megablockbusters Gladiator and Shrek. The problem is that Dreamworks has only 45 films in its library, which is tiny by Hollywood standards. A healthy portfolio is needed to generate the kind of cash flow that money-munching film companies desperately need. Universal, however, has more than 1,500 flicks.

Plus, Dreamworks pays the Universal studio north of $60 million a year in fees to use its distribution system. So, fold Dreamworks into Universal and -- voila -- you get a hit-making machine that's saving $60 million or more a year. And that doesn't even taking into account the millions more that Universal pays Dreamworks in royalties for the Shrek ride that just opened at Universal's Hollywood theme park.


  Universal's current management has a strong record itself, turning out films like American Pie, A Beautiful Mind and The Fast and The Furious. But it has nothing to lose -- except overhead, after consolidating everything from marketing to accounting -- by doing a merger.

Plus, Dreamworks' distribution agreement with Universal allows Dreamworks to exit the deal with 12 months' notice if Katzenberg & Co. don't like whoever buys the studio. So, if Universal sells to someone unacceptable to Dreamworks, Universal would face the humiliation of having been dumped by Spielberg. That means the Dreamworks factor would have to be taken into account by any other potential buyer for Universal.

As much sense as this deal would make, getting Dreamworks to agree to it won't be easy. The studio talked merger two or three years back with MGM, which also has its own massive library. But Geffen and his partners didn't want to answer to MGM owner Kirk Kerkorian. And they're not likely to be all that eager to answer to some other owner, be it Malone or even Diller, who's likely to be Malone's partner in the deal. That means that it would have to be an awfully good agreement to get Dreamworks to give up its independence. It would especially have to appeal to Katzenberg, who would do most of the heavy lifting running the new company while Spielberg concentrates on films and Geffen on dealmaking. Geffen and Katzenberg both declined to comment for this piece.


  So, how does all of this shake out? Those who know say when Vivendi starts collecting bids on June 15, the only serious bidders will be Marvin Davis and John Malone. Some question whether Bronfman can raise the money, and that NBC and MGM could drop by the wayside. Another rumor making the rounds recently has Viacom's Sumner Redstone buying the SciFi Channel, with Malone and Diller buying the rest of VUE. (Malone doesn't want the music company, but that's another story.)

All of which leads back to Dreamworks. If Geffen has a genius for anything, it's knowing a good deal when he sees it. And with Dreamworks in the enviable position of having a hot hand and a great distribution deal, he could probably get much of what he wants. Spielberg likely couldn't care less as long as he can still make films (and who wants to stop him?).

As for Katzenberg -- well, this deal would give him a true kingdom to call his own: a studio, cable channels, and theme parks. Heck, he'd be running a smaller version of his one-time employer -- Walt Disney (DIS ). And does anyone think that hasn't crossed his mind?

Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BW Online

Edited by Patricia O'Connell

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