George Soros, Hollywood Mogul?

The financier seems to be taking a big risk by paying $900 million for the DreamWorks live-action film library

No one will ever accuse George Soros of being a financial fool. And we're not going to start now. But you have to scratch your head a bit and wonder what the legendary 75-year-old financier was thinking when he signed the deal, announced by Viacom on Mar.17, to pony up $900 million to buy 59 films distributed by DreamWorks SKG.

Viacom's (VIA ) Paramount Pictures acquired the library as part of its $1.5 billion acquisition of the DreamWorks live-action studio in mid-December. As part of that deal, Paramount also won the rights to distribute DreamWorks' animated films, which the publicly traded company DreamWorks Animation SKG (DWA ) will continue to produce on its own.

The films that Soros and private-equity firm Dune Entertainment II are acquiring are hardly shabby. Among them are Academy Award winners American Beauty and Saving Private Ryan, Steven Spielberg's gripping World War II drama.

Of course, there are also some bona fide losers, including last year's megabomb The Island, and the 2004 yawner Win a Date with Tad Hamilton. On top of that, DreamWorks shares the rights to some of its movies. Universal is partner on Meet the Fockers and Seabiscuit, while Fox is a collaborator on Road to Perdition.

So how much cash flow does a library of 59 films generate, especially since many of the films have already been through their most lucrative "windows" -- such as sales of DVDs and showings on pay TV? By comparison, MGM, with more than 4,000 titles, generated cash flow north of $200 million last year for its older and less successful library.

MUSIC KICKER. So maybe there is $75 million a year of cash flow left in DreamWorks' much smaller lineup. Paramount certainly had the confidence to drive a hard bargain, according to those with knowledge of the deal, obliging Soros to return with a sweetened offer after studio rejected his first bid. According to the deal announcement, Soros signed a five-year distribution deal for Paramount to continue to sell the films to new buyers. Paramount gets an estimated 8% of the revenue as its fee, further cutting Soros' cash flow.

On top of that, Paramount retains the music-publishing rights for songs from the movies and "certain other ancillary" rights. The kicker is that Paramount also has the rights to make any sequels as well as "derivative rights" -- meaning TV shows, if any develop -- and merchandising rights.

In short, what exactly does Soros get? He seems to have bought an asset on the downside of its life and given up at least some of the upside. What he's clearly banking on is that the new worlds of digital distribution -- through everything from Apple's (AAPL )video iPods to cable TV video on demand -- will jump-start cash flow with new markets for spent product.

It has worked before, of course, as folks rushed out to buy older films on DVD. Still, Soros may be figuring that he can get out if things don't pan out. Under the arrangement, he can sell the library back to Viacom in five years at whatever the market value might be at that time.

"This transaction materially increases our expected return on invested capital for the DreamWorks acquisition," said Viacom Chief Financial Officer Michael Dolan, who structured the deal. "Additionally, we retain all the strategic and operational benefits of the combination."

In short, it's a win-win for Viacom. It pays down its costs of buying DreamWorks in December, and Viacom has a seat at the table if digital distribution starts to take hold. As for Soros, you have to hope he's a big fan of old movies.

READER COMMENTS

Grover is Los Angeles bureau chief for BusinessWeek

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