Disney, DreamWorks near distribution deal

Walt Disney Co., looking to bolster its movie operation, is close to making a distribution pact with Steven Spielberg’s new DreamWorks studio.

The surprise development comes after DreamWorks and Universal Studios failed to reach final terms on a distribution agreement announced in October.

Despite months of negotiations in the home stretch, Universal was unwilling to grant DreamWorks and its partner, India’s Reliance Entertainment, all the cash and concessions they demanded.

Universal executives were surprised to learn Thursday that DreamWorks had been negotiating secretly with Disney, according to people close to the matter.

The slight prompted Universal to swiftly break off talks with DreamWorks on Friday. The move underscores the pressure Hollywood studios are under to rein in costs, even to the point of passing up a deal with one of the industry’s most decorated filmmakers.

Disney, which had been among DreamWorks’ original suitors for a distribution deal last year, had signaled in recent weeks that it was interested in investing in the new studio. A deal could be struck as early as next week.

By aligning with DreamWorks, Disney hopes to shore up its movie studio, which is under pressure from declining DVD sales and an uneven performance of several of its pictures at the box office.

Along with such hits as “Beverly Hills Chihuahua” and “High School Musical 3: Senior Year,” the studio has also had disappointments with “The Chronicles of Narnia: Prince Caspian” and “Miracle at St. Anna.” Even the highly anticipated animated comedy “Bolt” was not the huge hit the studio had hoped for.

A deal with DreamWorks would also appear to reverse Disney’s course to release fewer movies while focusing on family-branded entertainment. DreamWorks produces a spectrum of pictures, including serious fare like “Things We Lost in the Fire,” which flopped; hit comedies like “Norbit”; and big-budget franchises such as “Transformers.”

DreamWorks would bring 17 projects to Disney that it recently acquired from its former owner, Paramount Pictures.

Since splitting last year from Paramount, DreamWorks has been struggling to raise funds for its new studio. Efforts to secure the debt portion of a desired $1.25 billion in total financing have been severely hampered by the global credit crisis.

That has made it difficult for DreamWorks, which employs 60 people, to cover its overhead and start production on up to six movies a year. At present, Reliance and Spielberg are bankrolling operations.

Reliance has made clear, however, that it will not hand over hundreds of millions in production funding until DreamWorks secures a matching amount in debt.

So far, DreamWorks’ lead bank, JPMorgan Chase, has received commitments from investors for less than half of the $325-million loan that Spielberg hopes to have in place by late March. Once that loan is secured, Reliance will match the bank contribution.

DreamWorks will then seek to raise about $200 million in additional debt, triggering a further investment by Reliance.

Reliance and DreamWorks had been pressuring Universal to advance $100 million of the total $250-million investment it sought for interim financing. But Universal refused.

Under the outlines of what was to be a 30-picture pact, Universal had not planned to invest in production or marketing but was instead to receive an 8% distribution fee.

The studio had also agreed to give DreamWorks $150 million after DreamWorks exhausted most of its equity funding.

But in recent weeks DreamWorks tried to renegotiate the deal by asking Universal for more cash upfront and to lower the distribution fee, people close to the talks said. They said Universal was willing to make some concessions, but wouldn’t give DreamWorks everything it wanted, including access to Universal movie slots on pay TV giant HBO.

DreamWorks is now asking Disney for the same terms it presented Universal: a total investment of $250 million with $100 million upfront and some movie slots with its pay TV outlet, Starz.

This is the second time that money issues have upended a deal between Universal and DreamWorks.

Before being sold to Paramount in 2006 for $1.6 billion, Universal had been in serious negotiations to acquire DreamWorks from Spielberg and his then-partners David Geffen and Jeffrey Katzenberg. But at the eleventh hour, Universal lowered its offer and the deal fell apart.

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claudia.eller@latimes.com