Universal Signs Deal to Extend DreamWorks Distribution

In a surprise eleventh-hour move, Universal Studios said Monday that it extended its international theatrical and worldwide home video distribution deal with DreamWorks SKG for five years after the 6-year-old entertainment company failed to conclude an expected arrangement with Warner Bros.

As part of the deal, Universal will give DreamWorks $250 million in the form of a loan and an advance against future revenue, sources said.

Universal essentially matched an offer that Warner Bros. parent AOL Time Warner was prepared to make with the studio that was formed in 1994 by Steven Spielberg, David Geffen and Jeffrey Katzenberg. Although the Warner agreement was close to being finalized, there were sticking points that remained unresolved as of late last week.

DreamWorks, which distributes its own movies in theaters in the United States and Canada, has had an international and global video distribution deal with Universal since 1995 that was set to expire at the end of this year. The new deal also extends Universal’s right to use DreamWorks characters and concepts in its theme parks. Under a separate deal, Universal Music also distributes DreamWorks tapes and CDs.

DreamWorks, which is more than $1 billion in debt, will use the infusion to pay down its liabilities and for production financing, sources said.

The DreamWorks partners had been shopping their distribution deal all over Hollywood since last year, hoping that one of the major media companies would agree to take equity in their company. But none of the parties, including Viacom-owned Paramount Pictures, Walt Disney Co. and News Corp.-owned 20th Century Fox, stepped up to the plate.

Despite its strong record at the box office, DreamWorks, which as a private company does not divulge its financial results, has not been profitable in part because it spends lavishly on marketing and often has to split profit with financing partners and top Hollywood stars and directors. For example, although “Saving Private Ryan,” a co-production with Paramount, was a worldwide box-office hit, DreamWorks made little money after a sizable chunk of the profit went to Spielberg, who directed, and star Tom Hanks.

With a staff of more than 1,000, DreamWorks carries huge overhead, particularly because of its extravagant animation facility in Glendale. The company, in which billionaire Paul Allen is the lead investor, has been far less successful in its television, music and Internet endeavors than in its live-action movie business.

Heading into the weekend, Warner appeared to have the inside track. But, to the apparent surprise of Warner executives, lawyers for DreamWorks and Universal quietly hammered out a deal by late Sunday evening.

One of the sticking points in the Warner negotiations was that DreamWorks partners clashed with Warner Home Video President Warren Lieberfarb, who had shown strong resistance to the arrangement from the get-go.

Universal Studio officials declined to comment on the financial details of its deal. “This deal does not put us at financial risk and is very equitable for DreamWorks and Universal,” said studio President Ron Meyer.

Last week, Meyer let the DreamWorks partners know that even though they were far down the road with Warner Bros., “there was no reason not to do this deal together.” Meyer said Monday, “It’s a relationship that is now 5 years old and very comfortable for both of us.”

When the parties first began discussing an extension of the deal last year, Universal’s French parent, Vivendi, was not interested in giving DreamWorks the capital infusion the partners had been demanding. So, formal talks broke off and Universal brass was willing to let the deal go elsewhere. Reportedly, the fees it collected contributed less than 10% to the studio’s bottom line.

But one executive, AOL Time Warner Chief Executive Gerald Levin--who is known to love the idea of having as much content and as large a market share as possible--was very interested in doing a deal.

Monday morning, Time Warner President Richard Parsons called Warner Bros. Chairman Barry Meyer and President Alan Horn to inform them that DreamWorks had made a deal with Universal.

“We desired to make the DreamWorks deal but we needed to make a deal that made sense for both parties and we couldn’t come to terms,” Horn said Monday. “Any deal is a package of points and we couldn’t arrive at an agreement on enough of them.”

Horn stressed that Warner Bros. continues to have a strong relationship with DreamWorks, with which it is co-financing and distributing two movies: the Spielberg-directed “A.I.” starring Jude Law and Haley Joel Osment, which is due out June 29, and “Time Machine,” which is before the cameras.