UPDATE: Universal has just PULLED OUT of its distribution deal with DreamWorks. Here's the statement:

Universal Pictures has ended discussions with DreamWorks for a distribution agreement. 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.‬‪‬‪
EXCLUSIVE: Trust me, I'm as shocked by that headline as anyone. And I still find it hard to believe. But I'd say that my info right now is that it's more 50-50 likelihood. In fact, some DreamWorks insiders tell me "it's imminent" and that to accomplish this Disney will likely sell off Miramax. Others think DreamWorks and Universal may still make things work. But I can tell you that DreamWorks' decision one way or the other may come as soon as 48 hours.

So here's what happening: sources tell me that DreamWorks 2.0 needs money from outside sources so that its Reliance biz prtnership stays on track. So a straight distribution deal isn't good enough anymore. The new deal Dreamworks wants involves distribution AND money. That Dreamworks still does not have any formal agreement with Universal is something of a surprise after all this time. But it's because DreamWorks has gone back to the studio asking for overhead, production, etc. That isn't what Uni bargained for so negotiations have been dragging on for weeks. "Universal is trying to resolve what they need. But it's a lot more money than the studio is willing to give them," one of my sources says. Another tells me, "The deal for Universal isn't as attractive as before. What was once free is now going to cost." I gather that Universal isn't even sure how much DreamWorks is specifically asking for. It's like: as much as you can give. Back to Disney, whose Bob Iger has wanted to be in biz with Steven Spielberg and Stacey Snider since they started thinking about leaving Paramount. I do know it was David Geffen's first choice for DreamWorks 2.0 (followed closely by Fox, and Universal only a distant 3rd), but he couldn't talk Spielberg out of "going back home" to Universal where the director's Amblin office has long been on the lot. DreamWorks 2.0 would be especially enticing to Disney because Spielberg/Snider are planning to make only about 6 films a year, and Disney is now rolling out just 12 pics annually -- the least of any of the majors -- so it could use more product. Whereas Universal already has more than enough pics to release. Plus, Spielberg personally has always loved family fare and admired Disney's incredible marketing machine worldwide, so there's tremendous synergy there. "The Disney deal has always been strategically better on paper," one DreamWorks insider tells me. MORE

2ND UPDATE WRITETHRU (refresh for new info throughout): I can report exclusively that financially desperate DreamWorks needed $250 million -- $100M immediately and $150M later in the second tranche -- to save its foundering Bollywood partnership. So Stacey Snider and Steven Spielberg demanded to change the terms of their deal with Universal already announced to the world so it would now include straight distribution and a $250M investment. But Universal balked. The studio was very reluctant to even invest $100M.

As the negotiations dragged on for weeks, that's when DreamWorks began secret talks with Disney. When I found out about the DreamWorks/Disney negotiations last night, DreamWorks suddenly began ducking my calls. Because Snider/Spielberg have been moving heaven and earth to make sure no one in the media found out the true details of just what a fiscal crisis their company is in. Also last night, I confirmed that Universal didn't even know about any DreamWorks talks with Disney until I informed the studio. You see, DreamWorks had hoped to play Disney and Universal off one another and snag the best deal for itself within the next 48 hours.

But this morning, Universal got the upper hand: it PULLED OUT of its deal with DreamWorks. "We weren't going further. This deal got to the point where it's not in our interest," a furious Universal bigwig just told me. "And then when you learn they're negotiating behind your back, it reflects upon what kind of partners you're getting into business with." I've also learned that, today, Snider phoned Universal Studios prez/COO Ron Meyer to apologize. "We had to do this. Our backs were against the wall. We couldn't tell anyone about our discussions with Disney." To which Meyer replied, "What you did was wrong on every level."

Now DreamWorks has to keep its fingers crossed that Disney will still come up with the cash that Spielberg/Snider need. And given Disney's reputation for hard-nosed negotiations, that's dicey without a rival bidder. Although not part of the DreamWorks discussions, I've been hearing for months that the Mouse House has been wanting to "unload" Miramax, and my sources believe that a DreamWorks deal will light a fire under Disney to sell the specialty unit that once belonged to Harvey and Bob Weinstein.

I hear DreamWorks' deal with Disney is done and will be announced next week.

DreamWorks and Disney to announce movie deal-WSJ

Sun Feb 8, 2009 8:45pm EST

NEW YORK, Feb 8 (Reuters) - Walt Disney Co (DIS.N: Quote, Profile, Research, Stock Buzz) is expected to announce a movie distribution deal on Monday with DreamWorks SKG, the movie company controlled by Steven Spielberg, the Wall Street Journal reported on Sunday, citing people familiar with the matter.

The Journal said Disney will distribute around six movies a year for DreamWorks. It will also likely provide some form of financing for DreamWorks, either in the form of a loan or a line of credit of at least $150 million, the paper said.

Under the deal, Disney would collect a distribution fee of at least 8 percent from DreamWorks, the paper said.

DreamWorks has produced movies such as "Saving Private Ryan" and the action hit "Transformers," but has been looking for cash since splitting off from Paramount Pictures last year and taking itself private with the backing of Indian media conglomerate Reliance ADA.

DreamWorks SKG and Universal Pictures severed their film distribution pact on Friday.

Universal, a unit of the NBC Universal media division of General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz), said it broke off "several weeks" of talks on a distribution deal after the smaller DreamWorks "demanded material changes to previously agreed upon terms." (Reporting by Michael Erman, Editing by Ian Geoghegan)


© Thomson Reuters 2008

I thought Katzenberg hated Disney?

Then again, Eisner is no longer with the company...

Company News February 9, 2009, 4:43PM EST

Disney's Iger: DreamWorks is a 'Perfect Fit'

Steven Spielberg's studio signs a distribution deal with Disney after its deal with Universal Studios goes sour

By Ronald Grover

Sometimes, in a CEO's life, you really do get a second chance. Just ask Walt Disney (DIS) Chief Executive Bob Iger, whose company announced on Feb. 9 that it had snagged the distribution rights to Steven Spielberg's DreamWorks Studio films. Financial details weren't publicly announced.

Only last week Spielberg's studio was thought to be in business with Universal Studios (GE), which had announced in October that it signed DreamWorks. But that deal went sour, and Disney got back in the picture.

According to Iger, Spielberg had negotiated with Disney this summer, and a deal might have been done, but Spielberg "had an emotional attachment to Universal and decided he wanted to go there instead." Indeed, other sources with knowledge of the talks say Disney offered a pretty cushy deal last year, taking a rock-bottom 8% of the revenues for distributing the six or so films the new studio wanted to make.

Spielberg Changed His Mind

But DreamWorks, which at the time was splitting from an often stormy three-year association with Paramount Pictures (VIAB), went to Universal, where the superstar director had spent his early years and turned out such blockbusters as E.T. The Extra Terrestrial and Jaws. At Universal, DreamWorks was to pay the same 8% distribution fee.

But by January, says Iger, Spielberg had made it known that he no longer wanted to stick to his Universal deal. "I got news that he was rethinking his decision and that he felt that Disney was the place he should have gone to all along," Iger said. But, Iger said, "the world had changed since then, and the terms of the agreement had to change as well."

Iger says the changes in the deal terms were "not earthshaking." In fact, sources with knowledge of the new pact say that Disney gets a better distribution fee—it gets 10% instead of the original 8% —and that it is prepared to give the new DreamWorks partners a line of credit of less than $150 million to help jump-start production. The first DreamWorks picture is expected to hit theaters in 2010, according to Disney.

Disney's Cable Slots Were Appealing

So how did Iger get his second chance? Part of it has to do with the slack economy. Spielberg and longtime production partner Stacey Snider, who own the company in a 50-50 joint venture with Indian media giant Reliance Big Entertainment, had been having trouble raising money to launch the studio. With banks tightening their lending, the duo had asked Universal, which had agreed to provide a $125 million line of credit if they couldn't get enough financing, to make a $250 million investment in the company.

Universal would go only as high as $200 million. DreamWorks also wasn't assured of getting enough of Universal's slots from HBO to make the films profitable. Disney, meanwhile, had available pay TV slots under its deal with Liberty Media's (L) Starz cable network. Moreover, as Iger said, Disney is now more focused on making Disney-branded films. That makes DreamWorks' brand of action, comedy, and other flicks —which would be distributed under Disney's Touchstone label aimed at adults—"a perfect fit for us."

Grover is Los Angeles bureau chief for BusinessWeek.