Disney Wishes Upon a Starwave With Stake in Web Firm

In an apparent attempt to become a major force in cyberspace, Walt Disney Co. has signed a letter of intent to acquire a minority share of Starwave Corp., the company owned by billionaire Paul Allen that designs and runs World Wide Web sites, including ESPNet-SportsZone, an executive knowledgeable about the deal said Thursday.

Disney and Allen representatives declined to comment on the deal.

In an unusual twist, the preliminary agreement calls for Disney to acquire roughly one-third of Starwave but to take over management control of the company, according to the executive.

The deal would value Starwave at close to $300 million, making it the highest price ever paid for a company involved in the emerging business of designing and operating Web sites. One source said Disney’s investment would be in the $80-million range.

The two sides are reportedly close to signing a final agreement. The final deal could involve a bigger stake by Disney, sources said.

Disney is reportedly interested in Starwave’s creative talent to launch an online news site jointly with ABC. The news service would compete with a similar service from MSNBC operated under a joint venture between NBC and Microsoft Corp..

Disney also wants help with its plans to offer a a family-based Web service offering games, music and chat areas. Starwave already has its own family site, called Family Planet.

Disney currently operates a Web site, disney.com, that allows users to play games and get information about Disney’s entertainment parks. But so far, its efforts have been relatively modest.

Starwave has won critical acclaim for its work in designing and operating ESPNet-SportsZone, a joint venture between ESPN and Starwave that has more than 230,000 customers and is widely believed to be one of just a handful of Web sites that turn a profit.

Starwave also runs the NBA.com pro basketball site, the NFL.com pro football site and the Nascar Online auto racing site.

Disney acquired ESPN last year as part of its $19-billion acquisition of Capital Cities/ABC Inc.

The sports channel contributed significantly to Disney’s impressive rise in broadcasting profit in its recent first quarter, analysts said.

According to an executive familiar with the deal, Allen will make the unusual move of turning over management of Starwave’s operations to Disney in return for a minority investment because of Disney’s reputation for putting strong management teams in place.

Although Starwave has a reputation for attracting strong creative talent, it is widely believed to be poorly managed. “I could do what they are doing with half the people,” said one media executive familiar with Starwave’s operations.

Because Bellevue, Wash.-based Starwave is privately owned, it does not disclose earnings, but its revenues are estimated to be $15 million, and analysts assume it is losing money.

Starwave President Mike Slade has been under pressure to improve the finances of the company to prepare for an IPO. Slade could not be reached for comment.

For Allen, a Disney investment would offer an important endorsement of his technology vision. Although Allen has invested in a range of properties related to the “information superhighway,” few have returned much in the way of profits.

Allen’s other major properties include the Portland Trailblazers basketball team, most of the Los Angeles-based Ticketmaster Group Inc. and a large stake in DreamWorks SKG.

Bloomberg News contributed to this report.