When the Paramount Pictures unit of Viacom announced two months ago that it would acquire DreamWorks SKG for US$1.6 billion, the deal was heralded as a "coup" and a "fantasy come true" by the news media and analysts alike.
The combination of Sumner Redstone of Viacom, Brad Grey of Paramount and the triumvirate of David Geffen, Steven Spielberg and Jeffrey Katzenberg at DreamWorks made it seem as if the company should be renamed DreamTeam.
It is too bad that so many investors and analysts became star-struck, because they appear to have overlooked doing any real analysis of the transaction. If they had, they might have come to this conclusion: Geffen, a master negotiator, twisted Viacom into overpaying so much for the deal -- outbidding General Electric's Universal -- that the producers of the bloated box-office flop Waterworld may start to look smart.
This may all become apparent in the next couple of weeks, or possibly sooner, as Paramount nears a deal to offload DreamWorks' movie library to a group of private equity investors led by George Soros, according to people involved in the talks.
That deal, for about US$800 million to US$900 million, would mean that Paramount would rid itself of DreamWorks' paltry movie library of 59 films -- a smattering of hits like Gladiator and its flops like The Legend of Bagger Vance (don't worry if you can't remember that one) -- and use the proceeds to pay off the cost of the original deal. That would bring the final tally down to about US$700 million or US$800 million.
That may sound good -- it clearly is better than US$1.6 billion -- but then start thinking about what Paramount is acquiring. The answer is not much, except perhaps the most expensive production deal in Hollywood history.
As part of the agreement, Spielberg and Geffen have promised to produce four to six films a year for the next three years. If you do the math and assume that the distribution rights are worth US$200 million, which is a very high estimate, Paramount is paying the equivalent of about US$27 million a film, if Spielberg and Geffen were to make six a year and DreamWorks' library is sold for US$900 million.
If they make only four films a year, the price per film jumps to US$41 million. That's before hiring actors, engaging screenwriters or putting up the first dollar for actual production. Grey had better hope for some big blockbusters to make this work.
At the end of the three years, Paramount will have to renegotiate the contract with Spielberg and Geffen. And it is hardly a sure bet that they will extend the deal. On a conference call with investors and the news media when the deal was announced, Geffen was asked if he and Spielberg would move their offices from Universal Studios in the San Fernando Valley to Paramount's lot in Hollywood. His answer? "I don't think Steven will ever leave his offices on the Universal lot. He's spent his entire professional career there and he's not going to leave. My offices are there also."
The agreement, by the way, does not mean that Spielberg has to direct four to six movies a year, just that he has to produce them. While he has proved to be a great moneymaking director, his success as a producer has never matched his success as a director. His most recent flop as an executive producer was, um, The Legend of Zorro.
And the deal with Paramount is not exclusive, so Spielberg could theoretically produce films for other studios, too. Will he do his best work for Paramount or someplace else? That's an open question.
Get this: The men can approve, or "greenlight" in Hollywood parlance, any movie they want with a budget of up to US$85 million without asking a soul for permission. That is the same deal they had with investors at DreamWorks, except for the crucial fact that they were then the majority investors. Now they will spend Paramount's money.
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