Paramount Reportedly Set to Buy DreamWorks

The entertainment industry was startled Friday when Paramount Pictures swooped in and struck a deal to buy DreamWorks SKG, the independent movie studio that rival NBC Universal had spent six months pursuing, according to sources close to the matter.

As recently as October, Paramount had publicly denied any interest in the acquisition after its parent company, Viacom Inc., balked at the high asking price of $1.5 billion including assumption of debt. But Viacom’s board approved just such a bid Thursday, provided that outside investors help finance the deal.

As of Friday afternoon, they still hadn’t lined any up, but sources said investors would be selected after the deal’s announcement, which is expected as early as Sunday.

The acquisition would be a major coup for Paramount Chairman Brad Grey, the former talent manager who since being hired in March has moved aggressively to remake the struggling studio.

It also would mark the end of a dream hatched 11 years ago, when three of Hollywood’s most high-profile figures -- director Steven Spielberg, music mogul David Geffen and veteran studio executive Jeffrey Katzenberg -- set out to build a multifaceted entertainment empire. The sale to Paramount would leave the industry with just one major independent studio: Lions Gate Entertainment.

Executives from Viacom, Paramount, DreamWorks and NBC Universal declined to comment.

Under the deal, Paramount would gain control of DreamWorks’ live-action movie production operation and its relatively small, 60-title library, which includes such Oscar-winning movies as “American Beauty” and “Gladiator.”

It also would give Paramount the worldwide distribution rights to all animated movies made by DreamWorks Animation, which was spun off last year to public shareholders and would not be part of the purchase.

What Paramount would be buying is a significantly pared-down version of the studio that DreamWorks’ founders launched in 1994 amid media fanfare. Initially, the partners -- who were heralded as “The Players” on the cover of Time magazine in 1995 -- vowed to make their mark in music, film, television and the Internet in a new digital studio they planned to build near Marina del Rey.

But the partners soon abandoned plans for a sprawling studio campus at Playa Vista. And eventually, DreamWorks sold off its money-losing music label, all but shuttered its television production studio and ditched its ambitious plans for Internet and video game ventures.

Last year, the studio spun off its most successful operation: animation. Headed by Katzenberg, the unit produced such innovative computer-generated blockbusters as the “Shrek” films.

Even a scaled-down DreamWorks, however, would be a valuable addition to Paramount. It would ensure that the studio had long-lasting ties to Spielberg, one of the industry’s most successful filmmakers. Although Spielberg would not exclusively direct movies for Paramount, the studio would enjoy the same arrangement DreamWorks currently has: It would own half of every film Spielberg directs for other studios.

Paramount and DreamWorks have partnered on a number of major movies, including Spielberg’s hit remake “War of the Worlds” and “Saving Private Ryan.” The studios have several films in the works, including a screen adaptation of the Broadway hit “Dreamgirls” -- a pet project of Geffen’s for 25 years -- a remake of “When Worlds Collide” and a live-action version of “The Transformers,” based on the popular Hasbro toys.

The potential acquisition comes at an awkward time, just as NBC Universal is preparing to release Spielberg’s much-anticipated “Munich” on Dec. 23.

For Grey, who inherited the reins of Paramount from industry veteran Sherry Lansing, the acquisition of DreamWorks would help fill out the studio’s thin release slate.

DreamWorks also would feed Paramount’s international distribution pipeline as it dismantles its overseas partnership in United International Pictures and launches its own operation.

However, DreamWorks doesn’t make as many movies as it used to. Since late 2002, the studio has produced an average of six movies a year. Its track record is decidedly mixed, including such costly misses as “The Island.”

Grey is trying to revitalize Paramount, which flourished under Lansing with such profitable Oscar-winning hits as “Forrest Gump,” “Braveheart” and “Titanic” before hitting a three-year slump.

Grey and his boss, Viacom co-Chief Executive Tom Freston, have been meeting in New York this week with various private equity firms that would put up the bulk of the purchase price. The pair flew back to Los Angeles late Thursday night and met Friday morning with Spielberg and Geffen to seal the deal.

When Paramount first proposed making a play for DreamWorks in October, Viacom Chairman Sumner Redstone quickly rejected the idea. He was concerned that Viacom shareholders and potential investors would balk at a time when the media giant was preparing to split into two companies.

By early January, Viacom will become two separate, publicly traded entities. The new Viacom, to be headed by Freston, will include Paramount, MTV Networks and cable channel BET. The other company, CBS Corp., will be led by Leslie Moonves, and include the CBS and UPN television networks, Paramount Television, Infinity Broadcasting and cable channel Showtime.

For some months, Redstone had told investors that Viacom did not plan to make any major acquisitions.

On Friday, analysts were surprised by a story in the Wall Street Journal saying Viacom had resurfaced as a bidder.

“It is somewhat of a communication conundrum,” said analyst David Miller of Sanders Morris Harris Inc. “That style of communication never really helps stock prices in the long run.”

Redstone, who was traveling overseas, was not available for comment.

Viacom is expected to contribute only about $300 million in cash and the equity partners would kick in $700 million, said one source close to the situation, who like others interviewed for this article asked to remain anonymous because the deal is pending. DreamWorks has about $500 million in debt.

Although DreamWorks had told NBC Universal about a week ago that it had another potential buyer in the wings, Universal’s management was caught unaware Friday.

DreamWorks gave the brass at NBC Universal one hour to increase its offer before making a deal with Paramount. NBC refused to budge.

Geffen shrewdly played two close friends -- Grey and Universal Studios Chief Ron Meyer -- against each other to get the highest price for DreamWorks.

Geffen was livid when NBC Universal tentatively agreed to pay $1.5 billion for DreamWorks this summer and then, days before its exclusive negotiating window was to close, slashed its bid by about $100 million. Talks broke off but later resumed, leading Universal executives to believe they were on track to buy DreamWorks.

Many in Hollywood expected DreamWorks to end up at Universal, where Spielberg has historic ties. He has long based his production company on the studio’s lot. It is the place that gave him his first break as a young director and where he made such blockbusters as “Jaws,” “E.T. the Extra-Terrestrial” and the “Jurassic Park” franchise.