By Ronald Grover
News that Paramount Pictures (VIA ) has reached a preliminary deal to buy DreamWorks is proof positive of one of Hollywood's great truisms -- don't make David Geffen mad. The deal, which calls for Paramount to pay $1.6 billion –- about $1 billion in cash and another $600 million in debts, was struck in a last-minute flurry of meetings on Dec. 9 when Geffen apparently tired of what he saw as stalling tactics by NBC Universal (GE ), with which he believed he had a deal to sell the studio three weeks ago.
In fact, according to sources, the NBC Universal deal was within hours of being announced just before Thanksgiving. Then NBC, owned by General Electric, asked for more financial data in what DreamWorks perceived as a move to lower the price, which had been negotiated over five months.
EXERCISING AN "OUT."
"You can't believe how upset that made David," says one source with knowledge of the transaction. "For him it was a matter of honor. He thought he had a deal." Indeed, Geffen, who's known in Hollywood as a shrewd dealmaker, began to apply pressure on NBC Universal. He informed the Universal studio executives that DreamWorks intended to unilaterally end an arrangement in which Universal distributed DreamWorks live-action films in foreign markets.
DreamWorks had an "out" to end the agreement if Universal changed the structure of its arrangement to distribute films in overseas markets. That arrangement, which Universal has said it would unwind, was ironically a joint venture with Viacom-owned Paramount. According to sources, Geffen had already told Universal that DreamWorks would begin distributing its films though another company in late 2006, when its obligation to Universal ended.
Geffen, who made his fame creating and then selling off two separate music companies to Time Warner (TWX ) and Universal, was angered when GE, Universal's parent, appeared to stall the talks by asking for increased financial data, according to those with knowledge of the deal. But the breaking point came after the two sides appeared to have settled the purchase for $1 billion in cash and around $400 million in assumed debt but GE came back to ask to lower the bid by an estimated $200 million.
TIME WAS RIGHT.
"It was literally within an hour or two of being signed," says this source. "And David went ballistic." The sale was for DreamWorks' live-action unit, which was launched in 1994 by Geffen, director Steven Spielberg, and Jeffrey Katzenberg. The 11-year-old studio has a library of 60 films and has made such flicks as Oscar winner American Beauty. It wouldn't include DreamWorks Animation (DWA ), which was spun off from DreamWorks in October.
NBC executives earlier declined comment, and DreamWorks offered no comment pending an announcement of the deal, expected on Monday Dec. 12. Paramount executives could not be reached for comment.
Geffen apparently had kept in contact with Paramount even after the studio had decided against making a bid in September. Viacom's board didn't want to make a major deal while it was splitting itself into two entities: a faster-growing cable-oriented company and one centered on the Infinity radio chain. But Viacom CEO Tom Freston began talks again on Dec. 6, when the split became official. On Dec. 8 Freston got approval from his board to make a new bid for DreamWorks, contingent on his lining up outside financing. That financing has yet to be arranged, but sources involved with the deal say private-equity firms have shown interest.
When Geffen was talking to Paramount, DreamWorks partner Spielberg was seen as the major obstacle to the deal. He had told Geffen that he wanted to maintain a relationship with Universal, which made his blockbuster ET: The Extra-Terrestrial and where his Amblin Entertainment production company has been housed for more than 30 years.
Late on Dec. 8, Geffen had asked Spielberg to reconsider, citing NBC Universal's latest move. An added benefit, Geffen told Spielberg, was that a deal with Paramount could enhance the value of DreamWorks Animation. Paramount parent Viacom also owns the Nickelodeon kids' cable channel -- an obvious outlet for promoting product from DreamWorks Animation.
On Dec. 9, Spielberg met with Freston and Paramount Pictures chief Brad Grey to give the deal his final blessing. And when Paramount offered slightly more than NBC Universal's last bid, Geffen accepted. The deal could still fall apart, and NBC Universal might yet come back to the table, but Paramount has asked for an exclusive negotiating period in which to complete the deal. In the meantime, Geffen the dealmaker will likely be keeping in close contact with executives at the GE unit -- just in case.
Grover is BusinessWeek's Los Angeles bureau chief
Edited by Patricia O'Connell