Sony OKs Paying Up to $500 Million to Get 2 Producers

Sony Corp. has agreed to hand over assets worth several hundred million dollars to Warner Bros. so that it can hire two prominent Hollywood producers to run its newly acquired Columbia Pictures Entertainment studio.

Under a settlement reached Thursday, producers Peter Guber and Jon Peters have been freed from an exclusive production agreement with Warner, enabling the pair to take the helm at Columbia Pictures two months after the Japanese electronics giant announced plans to buy the studio for $3.4 billion.

The settlement also throws Sony and Warner--which had been adversaries in an acrimonious legal fight over Guber and Peters--into business together. Warner will gain a 50% share of Sony’s lucrative mail-order record club, a subsidiary of CBS Records, as well as basic cable TV rights to Columbia’s feature and TV movies.

In addition, Columbia will swap its 35% share of the Burbank Studios for the former MGM lot in Culver City, now owned by Warner. And Warner will retain the rights to 50 Guber-Peters movie projects now in development, including “Bonfire of the Vanities” and the sequels to “Batman,” which has grossed more than $450 million worldwide.

The settlement brings to an end a $1-billion breach-of-contract lawsuit that Warner filed against Sony on Oct. 13 for hiring Guber and Peters. A countersuit filed by Sony also will be dropped.

Analysts said it is impossible to put a precise price tag on the settlement because it involves asset exchanges, not cash. But they estimated long-term gains to Warner of between $300 million and $600 million.

“It’s at least $300 million, and possibly close to a half-billion-dollar gain to Warner,” said Andrew Wallach, an analyst with Drexel Burnham Lambert. “It’s amazing what (Sony) is paying for these guys. I hope they make good movies.”

Mark Manson, an analyst with Donaldson Lufkin & Jenrette, estimates that in the long term the settlement could be worth $400 million to $600 million to Warner. “Whatever (the exact figure) is,” he said, “it’s an enormous amount of money to release two guys from their contract.”

Sony, which has been anxious to move into Hollywood movie production, agreed to the settlement on top of $200 million it already spent to buy the two producers’ company, Guber-Peters Entertainment Co., in a $17.50-a-share tender offer that closed earlier this month. That purchase price was nearly 40% above the company’s market value at the time.

Guber, 47, and Peters, 44, earned $50 million when Sony bought out their company, in which they owned a 28% combined stake. At Columbia, Sony will pay Guber and Peters each an annual salary of $2.7 million, rising to $2.9 million over five years. In addition, Guber and Peters will receive equity stakes in the studio.

Sony Corp. of America Vice Chairman Michael P. Schulhof called estimates of the settlement costs to his company “way off base. . . . Everyone wins in this transaction.”

The benefits to Sony, he said, include Columbia’s ability to completely control the studio’s own destiny on the old MGM lot, rather than continuing as a minority partner with Warner at the Burbank Studios.

In addition, Schulhof said, Warner’s participation in Sony’s CBS record club, called Columbia House, will enable the mail-order operation to expand overseas because it will have international access to Warner titles. Warner records account for about one-third of the club’s revenues in the United States.

Sony also stands to benefit substantially from the cable TV arrangement, Schulhof said. While Warner will receive a distribution fee, “we will get the lion’s share of the revenue,” he added. Analyst Manson agreed that “Sony is getting a good distribution deal. Warner is a superb distributor.”

Guber also stressed that the settlement includes important benefits for Sony and Columbia Pictures. “This transaction has two parties, and each party had strategic values that it wanted to achieve,” said Guber. Peters added that while the settlement appears to favor Warner now, Sony could be the winner over the long haul.

Guber said it was difficult for the pair to turn their film projects over to Warner. “We left tremendous value behind,” he said. “Ten years’ worth of work. But we recognized that they were the seeds of this opportunity (to run Columbia). They were what helped fuel it.”

Both Guber and Peters for years have told friends and associates that they dreamed of running a major Hollywood studio.

Analysts said Sony’s decision to give Warner a 50% share of the record club--the nation’s largest direct marketer of records, tapes and videocassettes--was the jewel in the settlement for Warner. The club’s revenues are roughly $500 million a year, with operating income of about $75 million, according to analyst Wallach.

Both the lot swap and Warner’s participation in the record club had been under negotiation before the dispute over Guber and Peters erupted.

The 144-acre Burbank Studios lot, worth more than $300 million, is considered a more valuable piece of real estate than the smaller MGM property, in part because of strict Culver City zoning restrictions on the historic property. Jeffrey Logsdon, an analyst with Crowell, Weedon, a Los Angeles brokerage, said the MGM lot is worth between $100 million and $125 million. Peters said Columbia plans to build a day-care center and add other upgrades to the property.

Despite the old MGM lot’s zoning restrictions and limited expansion opportunities, Columbia saw benefits in controlling its own movie lot. Warner, in turn, wanted to bring the operations of Lorimar Telepictures Inc.--which it acquired two years ago--from Culver City to the Burbank Studios.