Paramount Confirms Studio Deal

Paramount Pictures Corp. announced Sunday what everyone in town already knew: It had reached an agreement to acquire DreamWorks SKG, the studio founded 11 years ago by Steven Spielberg, David Geffen and Jeffrey Katzenberg.

But in revealing the terms of the $1.6-billion deal, Paramount included one unforeseen twist. To offset as much as $1 billion of the financial hit, the studio plans to sell DreamWorks’ 59-film live-action library, which includes the Academy Award-winning films “American Beauty” and “Gladiator.”

On Sunday, the studio said it was in advanced talks with outside investors. But instead of having a stake in the studio itself, those investors would buy control of the library outright.

“I can’t stress how transforming an event this is,” Paramount Chairman Brad Grey said in a conference call with reporters Sunday.

Should the deal go through, Paramount said it would pay $775 million in cash and initially assume $825 million in DreamWorks debt. Then, a private equity group, not yet selected, is expected to acquire the library for $850 million to $1 billion, including the assumption of $550 million in the DreamWorks debt taken on by Paramount.

Based on those numbers, that would reduce Paramount’s contribution to $325 million to $475 million in cash, plus the assumption of $275 million in debts owed to such third parties as Technicolor, HBO and NBC Universal.

The sale to Paramount, which is expected to close in the first quarter of 2006, would terminate DreamWorks’ distribution contracts with NBC Universal, which currently releases its movies outside the U.S. and its DVDs worldwide. For NBC Universal, the loss of those distribution fees could amount to tens of millions of dollars over the next five years, according to two people familiar with the deal.

That’s one reason executives at NBC Universal were smarting over the weekend. The studio, which is owned by General Electric Co., spent more than six months negotiating to buy DreamWorks.

Two sources close to the situation said the directors of General Electric had approved an acquisition of DreamWorks in a board meeting Friday.

But that same day, Paramount signed a definitive agreement with DreamWorks. Viacom Inc., which owns Paramount, had given its blessing the day before.

For Paramount, buying DreamWorks would accelerate a turnaround led by Grey, who has sought to reverse the lackluster financial performance and slow-off-the-mark culture of the historic studio since taking the helm in March. Once dominant in Hollywood with such blockbusters as “Top Gun” and “Forrest Gump,” Paramount in recent years has suffered from management turmoil and a box office slump that began before the current industrywide downturn.

The sale of DreamWorks -- one of Hollywood’s last stand-alone movie studios -- reflects how tough it is for independents to survive in an industry dominated by media giants.

“It’s a very difficult time in the movie business, even with the most extraordinary talent,” said Grey.

Under Paramount’s ownership, DreamWorks will not disappear entirely. It will continue to produce four to six movies a year under its own banner, with a total production budget of $300 million, sources said. That means Paramount would market and distribute 14 to 16 films annually. Grey and Geffen said that most of DreamWorks’ 500 employees would be absorbed by Paramount with “minimal layoffs.”

Geffen and Spielberg have each signed three-year employment contracts and would continue overseeing DreamWorks but would no longer have a financial interest in the company. Spielberg would not be tied exclusively to Paramount, though it would automatically co-own any movie he directed or produced.

Spielberg would be able to greenlight movies he directs with budgets of as much as $100 million, two sources said. Geffen, who would approve movies made with other directors, would have the authority to spend as much as $90 million without Paramount’s OK.

Katzenberg would have no role in the live-action operation at Paramount. He runs DreamWorks Animation, which was spun off in a public offering last year. Paramount, however, would have exclusive rights to distribute DreamWorks Animation’s movies and to use its characters in TV shows for the next seven years.

According to a source, one of many people interviewed who declined to be named because some of the elements of the deal are not public, Paramount already has received bids for the live-action library from two private equity firms that it declined to identify.

After the library sale, Paramount would retain worldwide distribution rights to the collection’s titles including Spielberg’s “Saving Private Ryan” and “War of the Worlds.”

That means Paramount would collect fees every time a library title is licensed.

Tom Freston, co-chief executive at Viacom, said that Paramount hoped to retain both a minority interest in the library and the right to buy it back at a future date.

All movies released by DreamWorks since October would be wholly owned by Paramount as would all future DreamWorks films.

The acquisition also would give Paramount DreamWorks’ film projects that are still in development and its television production unit, maker of such shows as “Spin City” and “Las Vegas.”

Gaining access to DreamWorks’ movies is a way for Paramount to fill out its own anemic release slate next year and beyond.

Paramount is also desperate for material to feed its international distribution pipeline. The studio ended its international distribution partnership with NBC Universal this fall.

Grey said that the hiring of DreamWorks’ relatively small international team would speed the building of its own operation.

Similarly, DreamWorks’ TV unit would plug a hole left by the pending split of Viacom into two public companies in January. The new Viacom, headed by Freston, will include Paramount, MTV Networks and cable channel BET.

As part of the split, the other company, CBS Corp., led by Leslie Moonves, will include Paramount’s TV production and syndication group as well as the CBS and UPN TV broadcast networks, Infinity Broadcasting and cable channel Showtime.

Grey, a longtime talent manager and executive producer of such TV shows as “The Sopranos,” said DreamWorks television could help Paramount expand into network production. But he called turning around the movie studio his “first priority.”

Paramount’s top business executive, Rob Moore, one of the architects of the deal, said DreamWorks would help strengthen the studio where it is weak. “This is great timing for us,” he said.

One of biggest prizes in the agreement is the distribution deal with DreamWorks Animation. The first animated film to be distributed by Paramount would be next summer’s release of “Over the Hedge.”

This would immediately make Paramount a major player in the lucrative family animation genre. It also would allow closer collaboration between Viacom’s Nickelodeon cable channel and DreamWorks Animation.

Freston said Sunday that Nickelodeon could develop TV series around established DreamWorks characters from such hits as “Shrek” and “Madagascar.” He and Katzenberg plan to meet today to discuss such projects.

Since being founded in 1994, DreamWorks has shrunk from a multimedia studio involved in movies, television, music, video games and the Internet to a scaled-back operation that produces and distributes a handful of films and TV series each year.

Its track record at the box office has been mixed, with such hits as “Catch Me If You Can” alongside such flops as “The Island,” a $130-million futuristic thriller co-financed by Warner Bros.

Spielberg has made a number of films over the years with Paramount, among them “Saving Private Ryan” and most recently “War of the Worlds.” And, DreamWorks and Paramount are also financial partners on several new film projects, including the adaptation of the Broadway show “Dreamgirls,” a pet project of Geffen’s.

Geffen said that he and Spielberg had no plans to move their production headquarters to Paramount from Universal--where Spielberg has been based for many years and where he made “Jaws,” “E.T. the Extra-Terrestrial” and the “Jurassic Park” films.

“I don’t think Steven will ever leave his office on the Universal lot,” said Geffen.

In a statement, Spielberg said, “Due to my very long history and my loyalty to Universal, I was saddened that after long negotiations and many compromises, we were unable to come to terms with Universal’s parent company, GE.”

Geffen was less nostalgic.

“Though we had agreed on terms, GE reneged on that deal,” Geffen said.

According to sources, GE had tentatively agreed to a $1.5 billion deal for DreamWorks and then, days before its exclusive negotiating window closed in September, cut its bid by about $100 million. The parties, however, kept talking and Universal was proceeding as if a deal would be done as recently as a week ago, when Geffen warned Universal that he had another buyer.

On Friday, Universal’s brass were shocked to learn how far along DreamWorks was with Paramount. In fact, Universal’s lawyers were still working on the fine points of their agreement.

NBC Universal chief Bob Wright and Meyer were unavailable for comment.