Paramount-DreamWorks, Happy for How Long?


If, or more likely, when, Steven Spielberg takes his outfit and splits for studios unknown, the animation arm will remain—for now

Just about everyone in Hollywood is waiting for the other shoe to drop in the Paramount-DreamWorks drama. Within the next few weeks, the live-action studio headed by superstar director Steven Spielberg will likely hotfoot it for another studio, taking a small fortune from backers in India to NBC Universal (GE), Fox (NWS), or somewhere else.

When and if that happens it won't exactly leave Paramount in the lurch. The Viacom studio (VIA) still has its lucrative distribution deal with DreamWorks Animation (DWA), home to Shrek, Kung Fu Panda, and other animated flicks. That's because Paramount's $1.6 billion purchase of DreamWorks in early 2006 brought not only Spielberg to the studio, but also the publicly traded DreamWorks Animation in the form of the distribution arrangement.

But as in any decent Hollywood tale, there's a twist to this script. DreamWorks dealmaker par excellence David Geffen had the foresight to build an exit clause into the Paramount deal that lets DreamWorks Animation walk away nearly two years earlier than anticipated. The deal is set to expire on Dec. 31, 2012. But DreamWorks can bolt earlier, if it chooses, by selling a 35% stake in the company and telling Paramount by Jan. 1, 2011 that it wants out.

Kung Fu Marketing

For now Paramount and DreamWorks look fabulously happy with one another. But in Hollywood's weird and wacky world of now you love me, now you don't, who knows how long this relationship will last? Under the 2006 distribution arrangement that DreamWorks signed with Paramount, it distributes DreamWorks' animated films for an 8% fee—small by Hollywood standards. It's small because DreamWorks Animation pays the $150 million or so to produce each of its computer-generated flicks.

Under the distribution deal, Paramount also gives DreamWorks wide latitude in helping to plot the marketing for its flicks. DreamWorks Animation Chief Executive Officer Jeffrey Katzenberg holds an all-hands meeting each Monday morning for the Paramount marketing crew. The sessions have paid off: Paramount has been very successful in marketing DreamWorks flicks, with Kung Fu Panda opening on June 8 with a hefty $60.2 million first weekend. When it passes $200 million, and it will any day now, it will become DreamWorks' biggest film not starring Shrek and his friend Donkey.

Little wonder that earlier this year Katzenberg told analysts in a conference-call that Paramount, under CEO Brad Grey, "has done a stellar job for us" and "[We] continue to have good relationships over there, from Brad on down." Paramount had no comment.

Setting the Stage for Future Deals

I'm not suggesting that's no longer the case, but in David Geffen's hands, the contract's out-clause is a valuable bargaining tool. And as he lines up Spielberg's next studio home, he might also have in mind setting the stage for the sale of DreamWorks Animation down the road. Maybe that's why it doesn't appear that Geffen has been fielding offers from Walt Disney (DIS) about Spielberg & Co.—although Disney would be a great place for some of Spielberg's adventure films. The reason: Disney bought Pixar a few years back and probably wouldn't want another computer animation powerhouse.

And it may just make a great deal of sense for Universal to be the lead candidate in the Spielberg race. Spielberg loves the place, to be sure. But Universal also could use an animation studio. Of course, who's to say that Paramount, as the 2011 date gets closer, won't simply try to buy the 35% stake itself. Stranger things have happened.

Any studio not named Paramount that buys DreamWorks Animation would only need to plunk down an early termination fee of $150 million, which in Hollywood is chump change, especially coming on top of the $1 billion or so it would take to buy the 35% stake in the first place. (In an ironic twist, Paramount paid DreamWorks Animation $75 million in 2006 to help it get out of its Universal deal.) Sometimes Hollywood dealmaking is enough to make your head swim. But in this case, you get the feeling that maybe David Geffen has it all pretty well plotted out.

Grover is Los Angeles bureau chief for BusinessWeek.

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