Warner Bros., PolyGram Near Financing Deal

PolyGram Filmed Entertainment is nearing a deal with Warner Bros. to shoulder half the overhead, production and marketing costs of its Castle Rock Entertainment movie business, according to sources close to the talks.

The potential arrangement underscores PolyGram’s substantial financial commitment to become a competitive player in Hollywood’s movie business, coming on the heels of its deal this week to cough up $225 million for a major 1,051-title film library, which coincidently includes rights to Castle Rock hit titles including “When Harry Met Sally . . .,” “City Slickers” and “Misery.”

Officials from PolyGram, Warner and Castle Rock declined to comment Friday, though sources said the parties hope to reach an agreement soon.

For PolyGram, the deal would represent hundreds of millions of dollars in production and marketing costs over the next several years. Castle Rock produces about five movies a year costing a total of about $250 million, plus an average prints and ads expenditure of at least $100 million.

Castle Rock’s television business, which includes the successful “Seinfeld” series, would not be part of the deal, nor would any movie titles previously produced by Castle Rock.

The arrangement would provide to PolyGram additional movies for its recently formed U.S. distribution operation, which the company hopes to build up to 20 releases a year to compete with the major studios. This fall, PolyGram offered its first major release, “The Game,” a $70-million thriller starring Michael Douglas, which was a box-office disappointment domestically, earning $46 million. The movie just began to roll out overseas.

PolyGram operates its own international distribution network through which it releases movies in about 80% of the world’s major territories, including Britain, France, Italy, Germany and Spain.

As part of the co-financing deal, PolyGram and Warner Bros., owned by Time Warner, would alternate the handling of the domestic and overseas distribution of each movie.

Castle Rock has been operating under a long-term domestic distribution deal with Sony’s Columbia Pictures, but that pact ends next year, after four more releases, the last of which is the Billy Crystal comedy “My Giant,” due out at the end of March.

The co-financing arrangement makes sense for Warner Bros., which funds Castle Rock’s overhead and movies, because it enables the studio to share the financial risk on releases it was once financing entirely on its own.

Castle Rock--headed by its five founding partners, Rob Reiner, Alan Horn, Martin Shafer, Glenn Padnick and Andy Scheiman--downsized significantly in June, halving its staff to 60 employees and cutting the number of movies it makes after its former parent, Turner Broadcasting System, was merged with Time Warner last year.

Sources at Warner Bros. say the studio is also talking to other parties about similar movie co-financing arrangements. For years the studio co-financed a number of films produced by Arnon Milchan’s New Regency Productions, which is leaving the fold after making a new deal with rival studio 20th Century Fox.

In a world of escalating production and marketing costs, many studios want to minimize risk on their most expensive movies, often teaming with competitors to share costs. For example, Warner and Universal partnered on last year’s blockbuster “Twister,” and Paramount Pictures seeks partners on virtually all of its higher cost movies.

Sources said a year ago that PolyGram and Paramount were engaged in serious discussions about a co-financing arrangement, but a deal never materialized.

At one time PolyGram had seriously considered buying Castle Rock, but was dissuaded from doing so because the movie company was locked into a multiyear distribution deal with Sony.

Los Angeles-based PolyGram Filmed Entertainment, whose parent company is 75% owned by Dutch giant Philips Electronics and operates the world’s largest music empire, is prepared to raise its investment in movies to well over $1 billion in the next couple of years. The company, headed by Michael Kuhn, owns various production labels, including Propaganda Films, London-based Working Title and the U.S. film distributor Gramercy Pictures, which has the current hit “Bean” in release with a worldwide gross to date of nearly $200 million.

PolyGram, which has lacked the kind of huge movie catalogs that rival the Hollywood majors, has been on the hunt for major film libraries since missing out on the acquisition of MGM and the Samuel Goldwyn Co.