Spielberg and Disney Joining Forces

Sometimes you really can't go home again. Just ask Steven Spielberg, who last October announced that he was moving his DreamWorks movie studio, after three years at Viacom's (VIAB) Paramount, back to his longtime home, Universal (GE). Now, faster than you can say Indiana Jones, Spielberg has changed course, leaving behind the place where he made such classics as E.T. the Extra-Terrestrial, Jaws, and Jurassic Park. He is expected to announce that he is saddling up with the Walt Disney Studios (DIS).

Take your pick: Either Spielberg decided to drop his tentative deal with Universal because, as banks froze, he needed a slug of money that Universal couldn't give him; or Spielberg was morally offended when, to seal the deal for Universal to distribute his films, the studio asked that he not "put" back to it a long-standing deal that gives Spielberg 2% of Universal's theme park revenues from merchandise—or about $50 million a year. At one time, that "put" was valued in the range of $500 million.

DreamWorks and Universal officials would not comment on why the deal fell through, although Universal did issue a statement that it was dropping plans to distribute DreamWorks' films because Spielberg's team "demanded material changes to previously agreed upon terms."

DreamWorks Struggles for Funds

The details are sordid, by Hollywood's usually kiss-kiss dealmaking standards. When two sides walk away, they usually do it with a deal to make projects in the future. Now, it appears Spielberg's DreamWorks studio will sign an agreement, possibly on Saturday, Feb. 7, for Disney to distribute an estimated six films a year. Sources with knowledge of the deal say DreamWorks will pay Disney the same 8% distribution fee to market the films, including those Spielberg directs, that DreamWorks had tentatively agreed to pay Universal, and that Disney will provide a $150 million line of credit to be used if DreamWorks runs low on production funds. Disney also promised to help DreamWorks raise added funds for the new company, sources say. Disney declined comment.

So what really happened? For starters, DreamWorks has been having trouble getting its studio off the ground. Although Indian entertainment giant Reliance has committed as much as $500 million to own a 50% stake, the studio has been having a difficult time raising the planned $700 million from a bank syndicate that its longtime bankers at JPMorgan (JPM) were attempting to piece together. It is now looking at raising $325 million, and Reliance has offered to kick in another $325 million. To get started, DreamWorks needed some up-front cash and asked Universal to provide it.

Sources say DreamWorks wanted $250 million and that Universal's top guys, including studio chairman Ron Meyer and NBC Universal chief Jeff Zucker, would only go as high as $150 million to $200 million. Universal also balked when DreamWorks asked that Universal cut its distribution fee to less than 8%, says one knowledgeable source.

GE Avoids Huge Payment to Spielberg

In addition, DreamWorks, which had pledged to Universal that it had HBO (TWX) lined up to show its films on cable, suddenly found that HBO wasn't interested. Sources say DreamWorks asked Universal for its own HBO slots, but Universal wouldn't give DreamWorks enough to satisfy the entire slate of six pictures a year it was planning to make.

On top of that, Universal had asked Spielberg to delay "putting" his 2% consulting fee for its parks back to the company, several sources say. According to those with knowledge of the deal, Spielberg has the right later to have Universal's co-owner General Electric pay him a hefty sum for that 2%, something that would further strain GE's already delicate financial situation.

Spielberg would face a hefty tax bill if he decides to "put" the consulting fee, and the superstar director said he had no intention of doing so.

Still, the request by Universal left a "bad taste in Steven's mouth," says one Spielberg associate, adding that it prompted the superstar director to rethink his association with the studio. The director grew up at Universal, where he was nurtured by former Chairman Lew Wasserman and onetime president Sid Sheinberg. "Suddenly, Steven realized this wasn't Lew and Sid he was dealing with; this was GE and their tight fists," the associate says. (A little history: Spielberg left Universal in 2004 after initially thinking he had signed an extension of his deal with Universal that included selling his company to the studio, only to be angered when GE tried to renegotiate that deal downward.)

Finding a Fit With Disney

Whatever the real reason for the tiff, by late January, DreamWorks was looking for another partner. Spielberg called Disney CEO Bob Iger. And within days the studio's Chairman Dick Cook was heavy in discussions with JPMorgan's Alan Levine, a former top Sony studio executive, and Spielberg's production partner Stacy Snider. Like Universal, Disney offered a $125 million line of credit. They also had slots available with the Liberty Media (LMDIA) pay-TV service Starz for DreamWorks' films. Moreover, because Disney makes fewer films a year than Universal, Spielberg and Snider felt it would spend more time marketing their films than Universal would.

So what's next? Spielberg & Co. aren't likely to leave their home of more than 30 years, a $6 million adobe complex that Universal built for the director in 1984. (For starters, DreamWorks pays Universal hefty rent.) And DreamWorks is said to be making slow but steady progress in lining up its $325 million in debt, which it plans to have in place by Mar. 31. It has a bunch of films in place, having recently spent $26.5 million (much of it Spielberg's personal money) to buy 17 projects it had been working on at Paramount. Among them is a comedy starring Steve Carell, to be directed by Meet the Parents director Jay Roach, called Dinner With Schmucks, and Motorcade, a drama about the Secret Service. At least one of the films is expected to begin shooting in May. Now it appears it has a studio that will get it into theaters.

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