DreamWorks out at Uni, talking to Disney

New pact expected to feature big financing component

DreamWorks has decided to follow the money.

The newly private studio has nixed its seven-year film distribution agreement with Universal after the studio rejected a demand to change its proposed $150 million contingency loan to DreamWorks into a $250 million financing with a delayed recoupment.

DreamWorks is now buttoning up a distribution deal with Disney, which had been a lead suitor for the output rights before Universal struck its pact with DreamWorks in October.

The Disney deal is expected to feature some sort of big financing for DreamWorks, which has been hard-pressed for start-up capital. Universal acknowledged the developments in a brief statement Friday, saying execs have been unable to finalize terms of their preliminary distribution agreement with the Steven Spielberg-led DreamWorks.

"Universal Pictures has ended discussions with DreamWorks for a distribution agreement," the studio said. "Over the past several weeks, DreamWorks has demanded material changes to previously agreed-upon terms. It is clear that DreamWorks' needs and Universal's business interests are no longer in alignment. We wish them luck in their pursuit of funding and distribution of their future endeavors."

There was no sign that the parties had been at loggerheads over the 8% distribution fee that DreamWorks had agreed to pay Universal to handle four to six films a year starting in 2010. The most direct source of aggravation appeared to involve the pay TV window for those films.

DreamWorks had hoped to lock into an output deal with HBO. But the premium channel decided to pass, and DreamWorks began dickering with Universal over alternate arrangements.

Details of prints & advertising arrangements also triggered difficult negotiations between representatives of cash-shy DreamWorks and increasingly frustrated execs at Universal.

Until October, DreamWorks was owned by Paramount. But DreamWorks brass including Spielberg and Stacey Snider used exit clauses in their executive contracts to bolt Paramount with the aim of resurrecting DreamWorks as a private company.

Reliance Big Entertainment of India agreed to invest $550 million in equity financing -- provided JP Morgan Securities could construct a loan syndication of a similar or higher amount. The investment bank has since lowered its target to $325 million, and RBE has done likewise with its immediate commitment to DreamWorks.

To get a flow of projects into the new company, Spielberg and RBE recently agreed to split a $26.5 million payment to Paramount to secure rights to 17 film projects DreamWorks execs had in development on Melrose Avenue. Spielberg previously provided a $10 million cash infusion to DreamWorks to get the new company launched.

Meantime, Disney offers a particularly good fit as a prospective distribution partner for DreamWorks, as the Burbank studio has markedly reduced its own film slate and thus has plenty of room in its distribution pipeline.

In fact, overhead on distribution infrastructure is so pricey that Disney arguably needs a big output deal of the DreamWorks sort to help monetize its assets appropriately. In light of that, some suggest the studio might even accept a distribution fee slightly lower than 8% on DreamWorks releases.

Well-placed sources said DreamWorks and Disney reps have been meeting for weeks.