Spielberg's Latest Cliffhanger: Financing

Plans for a reborn Dreamworks studio are hitting a roadblock in the credit markets

As Steven Spielberg is finding, even the world's most famous (and profitable) director can't seem to get a break from the sluggish credit markets. In September, it seemed that Spielberg and top lieutenant Stacey Snider, who ended their relationship with Viacom's (VIAB) Paramount Pictures, were set to start a reconstituted Dreamworks studio with India's giant telecommunications and media company Reliance Anil Dhirubhai Ambani Group in what their press release described as a $1.5 billion deal. Now that deal—at least at the outset—will probably be valued at only about $650 million because of recurring problems the two companies have been having putting together bank financing.

Although the parties aren't commenting, Hollywood has been buzzing for weeks that the Spielberg team has been unable to raise the $750 million or more that it had hoped to raise in September. That financing plan, being put together by Dreamworks' longtime bankers at JPMorgan Chase (JPM), has been scaled back to $350 million, and even now is getting only expressions of interest from banks—rather than formal commitments beyond the money that Morgan has pledged. The lowered level of financing has triggered a cut from the $550 million in equity that Reliance had initially expected to put in, say sources with knowledge of the deal. Reliance had initially pledged to match whatever debt DreamWorks raised, up to $550 million. It now expects to put in only $325 million, so long as Dreamworks can raise that amount. JPMorgan officials would not comment.

Paying His Own Way, for Now

Dreamworks had initially hoped to have its financing by January and now is said to be optimistic that it can raise the funds by the end of the first quarter. Until then, Spielberg is dipping into his own pocket and, along with Reliance, has financed the studio operation and the 60-odd people who left Paramount to join him. On Jan. 15, the two are expected to pay Paramount an estimated $27 million for the rights to 17 projects that Dreamworks had in development at their former home. Those films that include a comedy, Dinner for Schmucks, that is expected to star Steve Carell and to be directed by Meet the Parents director Jay Roach, as well as a Presidential thriller called Motorcade and a drama about the 1968 Democratic Convention called The Trial of the Chicago 7.

What's less clear is how the scaleback will affect Dreamworks' future plans. If it can get its financing in place, the studio still expects to produce the same six or seven films it had hoped to make under a seven-year distribution deal with General Electric's (GE) Universal Studios.

But raising the money seems to be a slog. Last year, before the banks began to choke, JPMorgan raised $340 million in a five-year note for independent film company Lions Gate Entertainment (LGF) along with Wachovia Bank, an Australian bank, and a private lender in Britain. That loan carried an interest rate of 2.25% above the benchmark LIBOR rate. This time around, according to banking sources, a loan would have to priced at closer to 4% above LIBOR. And Dreamworks would most likely have to agree to certain restrictions on how it operates, such as how much overhead it carries. (As part of its arrangement with Dreamworks, Reliance set budget limits on films that Spielberg and Snider could green-light without the Indian company's approval, although those amounts are said to be higher than the $110 million cap—$150 million if Spielberg directed—that Paramount imposed.)

For now, it appears as if the new Dreamworks has gone to Plan B—financing its first three years instead of the entire seven-year plan. The studio-in-waiting could go back to the markets in three years—or sooner, if things look up. But the greater hope may be that Spielberg and Snider, whose Dreamworks operation made such enormously profitable flicks as Transformers and Tropic of Thunder for Paramount, can generate the hefty returns in their first three years and then self-finance another four years worth of films. After all, who would want to wade into the shark-infested banking waters again unless it were absolutely necessary?

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