Pixar Purchase Pays Off for Disney

A lot is riding on the first movie to come out of the pairing, but in the end the deal is ripe even if Ratatouille simmers

Walt Disney used to say that his company was built on a mouse. You know, that squeaky little thing in red shorts and white gloves who scampered into the world in 1928 and has spawned billions in merchandise and theme parks. The Walt Disney Co. (DIS) may have been built on the back of a mouse, but this summer the company is pinning much of its box-office hopes on another rodent: a rat.

Remy, the animated star of Ratatouille, which is due to hit theaters on June 29, is a rat who improbably dreams of becoming a great chef at a fancy Parisian restaurant. It's the first film that animation powerhouse Pixar) has made since Disney plunked down $7.5 billion last year to buy the studio that created such box-office blockbusters as Toy Story, Finding Nemo, and The Incredibles.

Money Well Spent?

So, a lot of folks are waiting to see whether Ratatouille justifies all those Disney dollars that Chief Executive Robert Iger spent. A little background: At the time of the deal, Pixar, majority owned by Apple (AAPL) Chief Executive Steve Jobs, was nearing the end of its 14-year contract with Disney to jointly make films. Jobs and departing Disney Chief Executive Michael Eisner were sniping at one another, and Jobs was testing the waters for a move of his animation factory to Warner Bros. (TWX), Sony (SNE), or anyone not named Disney. When Iger replaced Eisner in late 2005, one of the first things he did was make nice with Jobs.

When Iger made the Pixar deal, several Wall Street analysts figured that he had overpaid. Heck, even Eisner came out of semi-exile to speak to board members, pleading with them to veto the rich deal. So now, there will likely be a ton of folks on Wall Street waiting to see whether Ratatouille is, well, a rotten tomato.

Box-Office Predictions

Chances are good that Ratatouille won't be a blockbuster. It's not the rollicking, show tune-laden, laugh-fest that Pixar usually makes. It is, however, a tremendously well-made, stylish film that will take your breath away in terms of technology—rat hairs look real and human movements are so authentic you won't believe they were generated by a computer.

The story is heartwarming; the dopey guy gets the girl, and the rat overcomes adversity to live his dream. "It's the most gorgeous animated film that I've ever seen," Iger (who, granted, is not exactly unbiased) said in a recent earnings conference call. "And in the best Disney and Pixar traditions, it's a terrific, funny, original story with a lot of heart that has all the makings of a classic."

Richard Greenfield, an analyst with Pali Research, figures Ratatouille will trail the $462 million worldwide box office tallied by Cars. That 2006 Pixar film was generally considered a modest disappointment because it fell short of the $631 million that The Incredibles grossed two years earlier and well short of Finding Nemo's $864 million worldwide tally. Still, Greenfield points out that Cars has gone on to sell tons more merchandise than anticipated. "This is not a story about how one film performs," he says.

More Than a Movie

Right he is. Because even if Ratatouille doesn't come out of the gate with some super-duper opening weekend, and folks say that Iger and company got snookered in the Pixar deal, it doesn't matter. Sure, the Pixar deal was pricey, but it was worth it. Disney all but reinvented itself with the deal. Top Pixar creative font John Lasseter has remade Disney's stumbling animated studio, replacing the director for the upcoming American Dog and jumping in to overhaul the recent Meet the Robinsons. The latter flick is approaching $100 million, a rarity these days for Disney-made animated films. Disney also gets a clear shot at making theme-park rides based on Pixar flicks, such as the new Finding Nemo ride at Disneyland.

Moreover, the deal was a signal to the rest of the creative community that Disney could attract and keep the likes of such big-deal animation directors as Brad Bird, who directed The Incredibles and Ratatouille, as well as Steve Jobs' top two Pixar hands, Lasseter and Ed Catmull. "We didn't buy Pixar for any one film," says Disney studio chairman Dick Cook. "We bought it for people like John Lasseter, Ed Catmull, Brad Bird, [Finding Nemo writer/director] Andrew Stanton, and many others who we hope will make hundreds of films for us."

Still, Disney couldn't be trotting out its first wholly owned Pixar flick at a worse time. The week after Ratatouille opens, little kids will be flocking to see the Steven Spielberg-produced Transformers, a live-action flick based on the long-running TV cartoon. On July 8, Harry Potter and the Hogwarts crew come to your local movieplex with the fifth in that series. And later in July, Fox (NWS) releases the The Simpsons Movie, quite possibly the summer's biggest animated release.

Creating Demand

But Disney will gear up its impressive marketing machine. It's already got billboards up everywhere promoting Ratatouille, along with well-timed Disneyland promos, and a multicity tour throughout the summer featuring a slide masquerading as a 25-foot-high piece of cheese. (I don't make this stuff up!) For the first time, Disney is also offering sneak previews—Ratatouille will be shown on June 16 to generate a little of word-of-mouth to help the flick take off.

On top of that, Disney has hustled to help take the sting out of the deal for Disney shareholders. According to Disney Chief Financial Officer Tom Staggs, the company is six months ahead of schedule in buying back those 279 million Disney shares it issued as currency in the Pixar deal. Indeed, since the deal, Disney stock has jumped 40%, in part due to Iger settling the Pixar issue.

So, while some shareholders may well be biting their nails waiting for Ratatouille to open, they've already got their Pixar premium. Maybe a cooking rat won't set new box-office records when it opens. But a deal isn't built on one rodent, even if Walt built his company on one.

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