DreamWorks- Viacom breakup could get ugly
The studio may clash with Viacom over movies, stars and other properties as it charts an exit strategy.

June 19, 2008
by Claudia Eller,

With divorce between DreamWorks SKG and Viacom Inc.'s Paramount Pictures a given, the only issue now is who gets custody of the children. Like custody battles anywhere, this one could get nasty.

In the coming weeks, DreamWorks will begin the complicated business of dissolving their bitter 2 1/2 -year union, leaving in limbo hundreds of movie projects, employees, talent and producers who work for the company.

Although Viacom owns all of DreamWorks' assets, there could be difficult negotiations should exiting DreamWorks principals want to take any of those properties -- or people -- with them to their new home. Among them: Ben Stiller, who co-stars in DreamWorks' "Tropic Thunder," a highly anticipated comedy that Paramount will release in August; and Eddie Murphy, who starred in several of the company's hits.

Untangling the rights to various properties could be tricky. Steven Spielberg has attached himself as a producer to at least 30 DreamWorks projects, which Paramount will not be able to make unless it pays him substantial fees. The filmmaker is guaranteed 7.5% of every box-office dollar collected by Paramount until the movie breaks even. Once the studio recovers its cost and earns a distribution fee, Spielberg is then entitled to 50% of the film's profit.

DreamWorks co-founder David Geffen, who has made no secret of his disdain for Viacom Chairman Sumner Redstone and Paramount Chairman Brad Grey, is hoping to raise $1 billion in equity and debt financing to return the company he co-founded with Spielberg and Jeffrey Katzenberg in 1994 to its roots as an independent outfit. It is unclear, however, what will become of DreamWorks' approximately 100 employees, who are under contract to Paramount.

For the last couple of months, DreamWorks has been in talks with one of India's biggest conglomerates, Reliance ADA Group, about financing the transaction and its slate of six movies a year.

Two people familiar with the talks said the parties were discussing a deal in which Reliance would put up $500 million to $600 million in equity and $600 million of debt, which would value the transaction at $1.1 billion to $1.2 billion. People close to the situation said a deal was weeks away. One said it could still fall apart.

Geffen declined to comment Wednesday.

Once DreamWorks secures financing, Geffen will look to make a distribution deal with another studio, most likely General Electric Co.'s Universal Pictures, where Spielberg began his career and still maintains offices on the back lot. Spielberg has indicated that Universal -- where he made such hits as "Jaws," "E.T. The Extra-Terrestrial," "Jurassic Park" and "Schindler's List" -- would be his preferred home.

But landing a deal there will depend on the kind of financial terms DreamWorks will be able to extract. Universal Pictures chief Ron Meyer, who is close to Geffen, declined to comment Wednesday.

Geffen has also talked to other studios, including News Corp.'s 20th Century Fox, about distributing DreamWorks' movies. Fox declined to comment. But one person involved in the discussions said Spielberg would have to be "convinced" to go anywhere other than Universal.

As soon as DreamWorks secures financing, Geffen plans to exercise an out clause in his Paramount contract, which in turn will enable Spielberg and Stacey Snider, who has run DreamWorks for the last two years, to depart effective Nov. 1. Snider, the former movie chairwoman at Universal, has also clashed with Grey, whom she said never treated her with the respect she deserved.

Once Geffen finds a new home for DreamWorks, he has told associates that he plans to "retire" and Snider will be made a partner with Spielberg in the reconstituted company. The two have enjoyed a close relationship for many years, going back to when Snider was a young production executive at TriStar Pictures, where Spielberg developed the movie project "The Mask of Zorro."

The impending breakup will come as a relief to both sides given the rancor that has come to define their relationship. Executives at Paramount and Viacom, which bought DreamWorks in December 2005 for $1.6 billion, have tired of Geffen's complaints and have been bracing for the departure of DreamWorks over the last year.

Viacom and Paramount executives declined to comment Wednesday.

Not long after the acquisition, Geffen and Spielberg came down with a bad case of seller's remorse. In their view, Paramount's Grey and his colleagues began grabbing too much credit for the studio's success with such DreamWorks-produced movies as "Dreamgirls," "Blades of Glory" and "Norbit."

Those movies played a pivotal role in a turnaround for Paramount, which had few projects in the pipeline when Grey took over in early 2005, and came at a time when some of Paramount's own films, including "Stardust" and "Zodiac," were costly flops. Not all of DreamWorks' movies worked, either. Three films lost significant money: "Things We Lost in the Fire," "The Heartbreak Kid" and Clint Eastwood's war drama "Flags of Our Fathers," which left Paramount and financing partner Warner Bros. about $40 million in the red.

Once Geffen began telegraphing his unhappiness with Paramount, the handwriting was on the wall. Geffen, Spielberg and Katzenberg, who runs the separate and publicly traded DreamWorks Animation, were livid last fall when Viacom Chief Executive Phillippe Dauman told investors that the financial effect of losing DreamWorks would be "completely immaterial."

On Wednesday, media analyst Harold Vogel echoed those remarks. "For Viacom, it will not look good officially because Spielberg is such an important filmmaker, but it may not make all that much difference in the long run," Vogel said. "Viacom's investors will be focused on what happens with the current Paramount management and their ability to generate their own projects and create their own legacy."

Paramount has relied heavily on a steady supply of movies from DreamWorks and has profited from their hits, including last year's $700-million global juggernaut "Transformers," which Paramount co-owned before buying the studio. The companies are currently in production on a "Transformer" sequel, which will be released next summer.

Post DreamWorks, Paramount will have to step up its own development and production output and prove it can sustain profitability with its own movies. It is unclear how many of DreamWorks' employees will remain at Paramount. The future is also uncertain for DreamWorks producers, such as the husband-and-wife team Walter Parkes and Laurie MacDonald, and former Disney executive Nina Jacobson.

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