DreamWorks, MCA Ally on Distribution : Entertainment: Each firm will split profits for the film- music deal worth $1 billion over 10 years, Seagram says.

Seagram Co., in its first major move since buying 80% of entertainment giant MCA Inc. last week, announced Tuesday that it has forged an alliance with the new DreamWorks SKG studio in a deal expected to be worth at least $1 billion to MCA over 10 years.

The agreement calls for DreamWorks--founded by director Steven Spielberg, former Walt Disney Studios Chairman Jeffrey Katzenberg and music mogul David Geffen--to pay MCA fees to distribute its movies in foreign countries and its videos worldwide.

In turn, MCA will distribute music from DreamWorks and SKG record labels, with Geffen’s former company, MCA-owned Geffen Records, as a partner. The two companies will each put up 50% of the money for the venture and split profits, and DreamWorks will keep the copyrights.

MCA is also buying a 2% stake in DreamWorks for $54 million. MCA gains the rights to DreamWorks-developed characters in its Universal Studios theme parks. DreamWorks will distribute its movies domestically and retain TV rights.

The alliance does not resolve the question of where DreamWorks will be physically located. MCA is apparently still offering to carve out a piece of its lot where the company could build its own studio.

DreamWorks partners have been considering whether to make their home at the ambitious Playa Vista development near Marina del Rey. Even if DreamWorks makes a deal at Playa Vista, it would take at least three years to complete construction, during which time the partners would remain at Spielberg’s company, Amblin Entertainment, on the back lot at Universal Studios.

DreamWorks expects to release eight or nine live-action movies and one animated movie a year. Katzenberg estimates that it will take three or four years to work up to that number. The company’s first live-action movie is expected to hit screens in 1996, and the first animated feature will be rolled out in the fall of 1998.

Although the agreement between Seagram and DreamWorks was widely expected, it nonetheless is an important step for Seagram Chief Executive Edgar Bronfman Jr. as he plunges into Hollywood.

On June 5, Seagram formally paid $5.7 billion to buy the MCA stake from Matsushita Electric Industrial. Earlier the same day, Bronfman’s efforts to lure agent Michael S. Ovitz to run MCA abruptly unraveled, raising concerns among some investors that the company was being left in limbo.

The stock of beverage giant Seagram, which dipped in price after the Ovitz talks ended, has since rebounded, closing at $30.875 on Tuesday, up $1.75 on the New York Stock Exchange.

For DreamWorks, the deal gives the company a bargain rate to have its films distributed in foreign countries by the top international distributor, United International Pictures, a joint venture between Universal, Paramount and MGM/UA. And both Geffen and Spielberg, whose companies have had ongoing relationships with MCA, are comfortable doing business there.

From a financial standpoint, the agreement with DreamWorks is virtually risk-free for MCA because it serves in a narrow role as a distributor for hire. Unlike standard distribution agreements, MCA will not be putting up the money to make the film prints or to advertise the films. But since it will have little investment at risk, MCA will receive a smaller than usual percentage of the gross from DreamWorks’ movies.

While neither MCA nor DreamWorks officials would disclose what distribution fees are for foreign and video, one rival studio executive estimated that DreamWorks was probably going to pay the studio around 7% or 8%--an extremely low amount by industry standards. Distribution fees range from 12.5% at the low end to the standard 30% for a producer making a movie for that studio. Today’s benchmark for top producers with distribution deals is 15%.

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Bronfman has been eager to make a deal with DreamWorks since Seagram, which his family controls, first agreed to buy control of MCA in April. Negotiations with DreamWorks stalled more than once.

In an interview Tuesday, Bronfman said the trio had been “extraordinarily patient waiting for us to name new management” before the Ovitz talks ended.

The principal points of the DreamWorks-MCA deal were worked out in a two-hour meeting last Wednesday at Geffen’s house. Present were Bronfman, Geffen, MCA Motion Picture chief Tom Pollock and DreamWorks’ business affairs head Helene Hahn. The parties, joined by other representatives of both sides, met again twice Monday to formally close the deal.

The DreamWorks deal also is important for Bronfman because it keeps Spielberg in the MCA family. The filmmaker has enjoyed his biggest box office and critical successes at MCA’s Universal Pictures unit--including “Jaws,” “Jurassic Park” “E.T--The Extra Terrestrial” and the Oscar-winning “Schindler’s List.”

Spielberg’s continued affiliation with MCA through DreamWorks hinged in part on whether he and his partners felt current MCA President Sidney J. Sheinberg--Spielberg’s mentor in Hollywood--was being treated fairly.

Sheinberg has been working out final details of a lucrative, Seagram-financed entertainment company but has pledged to stay on and run MCA for as long as necessary.

“He does not want to stay on and run the company long-term, and wants to get on and do his own thing. But he will be here as long as I need him,” Bronfman said.

In a statement, Spielberg called Bronfman “a gentleman of honor,” adding that “I am able to create a new home, without abandoning my first home.”

Geffen said: “I’ve known Edgar for 20 years. We’ve been friends a long time. I have no doubt that, whoever the management will be, we’ll be able to work with them.”

As an investor in DreamWorks, MCA joins billionaire Paul Allen and One World Media--a company with close ties to South Korea’s Samsung Corp.--which combined have committed $800 million. Four smaller investors--Microsoft Corp., Chemical Banking, Capital Cities/ABC and an investment arm of the Ziff family publishing fortune--have committed $27 million each for a 1% stake. In addition, Chemical has lined up $1 billion in bank credit, with Spielberg, Katzenberg and Geffen each putting in $33.3 million.

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As part of the alliance announced Tuesday, pre-existing Amblin projects--with the exception of remakes and sequels such as the next “Jurassic Park” film--will become co-ventures between MCA and DreamWorks. MCA’s Pollock estimated that there are more than 30 such projects in development at Amblin. They are valuable to DreamWorks because it gives the company a leg up on development, which can be a long and laborious process.

With respect to all new DreamWorks live-action and animated movies, Katzenberg said in an interview: “We are funding 100% of all costs associated with our product--development, production, making, marketing and distribution on a worldwide basis.”

How much MCA reaps depends on how the films perform. Sources estimate that the cash value of the deal to MCA is well in excess of $1 billion from fees it will collect over the 10 years and could be more.

“Obviously, we expect to make a lot of money with these people over the next 10 years, but more importantly we are exploring other relationships in book publishing, interactive, television and consumer products.” Pollock said. “We think we can create value for them and they can create value for us.”