Is big deal worth the big bucks?

Wall Street ruminates as D'Works shakes the Par tree

Not since Sumner Redstone outbid Barry Diller for Paramount has there been this much second-guessing about a studio acquisition.

One month after Paramount’s $1.6 billion buy of DreamWorks, the studio has been bedeviled by bad press, even though Par execs insist the deal was a no-brainer.

It’s not every day a major studio reassembles itself from scratch. But the surrounding friction has been gradually rising since the first wave of media admiration when Par snatched DreamWorks from Universal’s arms.

Even last year’s MGM acquisition by Sony and Comcast, which outmaneuvered Warner Bros. in the 11th hour, failed to stir up this level of controversy.

That’s partly due to timing.

A year ago, the studio saw a total regime change, with the usual firings and management upheaval. The DreamWorks deal followed soon after, with another wave of pinkslips.

Execs at Par and parent company Viacom say the merger makes absolute sense, a fact disputed in negative post-mortems, culminating in a March 12 New York Times article bashing the economics.

The story assumed the DreamWorks library would sell for $900 million, and factored in $200 million of distribution fees — bringing the purchase price to $500 million.

With David Geffen and Steven Spielberg committed to make four to six movies over three years, the Times concluded that Par paid the duo $25 million to $41 million per film — before a penny was spent on production.

Studio execs call that logic dead wrong. The Times’ calculation, they say, ignores significant distribution fees from DreamWorks Animation ($350 million-$400 million) and live-action films ($150 million), as well as substantial tax benefits (circa $200 million) that would accrue to the studio.

It also excludes $100 million worth of films that were completed or had completed principal photography when the deal closed — movies Par didn’t have to pay for.

Execs cite $50 million for several other pics already in pre-production, development or early principal photography; and $150 million from pics including “Munich,” “Memoirs of a Geisha,” “Dreamer” and “Match Point” that had been released theatrically.

“These movies were completely financed, the P&A spent. Any revenue is all profit,” says Rob Moore, Par prexy of worldwide marketing, distribution and operations.

All told, when added to synergies created by the combination, these components have an aggregate value of approximately $1.5 billion, according to the company.

Wall Streeters agree with Par that it’s odd to describe the merger as an overly rich production deal.

“I don’t think I’ve ever seen anybody divide (a purchase price) by future films,” says Dennis McAlpine of McAlpine Associates.

Viacom chief financial officer Michael Dolan insists the deal put zero economic value on the relationship with Spielberg, Jeffrey Katzenberg and Geffen.

The pricetag has “nothing to do with an assumed value of the movies going forward,” he says.

The pitfalls of this deal don’t really lie in the pricetag.

First off, there’s bitterness in Tinseltown as Par staffers, having survived a first round of cuts by Brad Grey’s new regime, were axed in favor of DreamWorks’ folks.

And the plethora of corner offices is confusing the creative community as they wonder whom to pitch projects to.

Spielberg, Geffen and Stacey Snider’s insistence on keeping their digs on the Universal lot can’t be a plus for logistics or unity.

However, there’s general agreement on both coasts that the DreamWorks deal has jumpstarted a recovery at moribund Par; and that managers coming in are talented and assets to the studio, where there’s a new feel of energy and movement.

For now, some Wall Street analysts are slapping “neutral” ratings on Par parent Viacom, meaning they’ve got no idea where the studio’s heading.

Financially, they think the deal’s sound, assuming Par keeps its promise to sell DreamWorks’ 59-title live-action library for about $900 million. That deal is expected imminently, with Soros Fund Management the buyer.

Intangible benefits include a television sales force led by highly respected veteran Hal Richardson. Viacom surrendered that unit to CBS when the two companies divorced. “CBS got the silverware and the TV sales force,” Dolan jokes.

Par also got a new domestic distribution team and new systems division to upgrade antiquated technology.

“We excluded a lot of things (in calculating the value of the deal) we think are real benefits,” Dolan says.

He denies rumors that the pact included a promise to favor DreamWorks’ employees over Par’s. “Nobody ever said, ‘Here are people who have to be in these jobs.’ It was, ‘Let’s go through this name by name.’ ”

Execs also refute the widespread belief that DreamWorks’ folks got all the jobs.

“The number of Paramount staffers outside of domestic distribution who were let go was 25 out of 2,000,” Moore says.

In domestic distribution, 109 Par staffers were axed. Only a handful from DreamWorks were let go.

“That was a big deal,” Moore acknowledges. “We made a decision that their organization, the people they had and the job they were doing (constituted) a much more efficient and effective group. … It wasn’t because they had DreamWorks business cards.

“Because that was so radical, it got a lot of attention and colored people’s judgment,” he adds.

Moore notes the March 10 bow of “Failure to Launch” marked the first release under the new team, “and it did 50% better than we thought it would.”

And all layoffs are over and done with.

Some in Hollywood have described the DreamWorks deal as one of desperation, with Par looking at slim pickings in ’06 as it builds up its slate.

The extra films certainly help, execs say. But “the deal was a no-brainer because of the price and what it did for us strategically. And that’s why we were able to move so quickly,” Moore says.

Now it’s showtime. And there are risks. Here are a few ways the deal could stumble:

  • If Spielberg ends up directing very few pictures for Par in the next eight years. It was recently reported he plans to take a year off before tackling his next project.

  • If DreamWorks under Snider doesn’t improve its spotty live-action record.

  • If the partners can’t quell the climate of political intrigue and create a harmonious management structure.

  • If Grey, who never ran a studio before, is not able to get Paramount’s pieces and people working together.