Paramount to buy DreamWorks for $1.6 billion

Film studio Paramount Pictures agreed to buy rival DreamWorks SKG in a $1.6 billion deal that bolsters Paramount and ends the efforts of three Hollywood moguls to build an independent new movie studio and television empire.

Paramount, owned by media conglomerate Viacom Inc., says its net price will be about $500 million to $650 million after selling off DreamWorks' 59-title library, which includes Oscar winner American Beauty and hit Gladiator, for $850 million to $1 billion.

The initial $1.6 billion purchase price includes assumption of debt and equity value of $774 million, Viacom executives said.

Steven Spielberg, director of movies like War of the Worlds and Saving Private Ryan, and DreamWorks co-founder David Geffen, will stay with DreamWorks as producer-director and chairman, respectively, and make four to six live action films a year.

DreamWorks' sales and infrastructure will be combined with Paramount. The deal is expected to close in the first quarter of 2006, and will not affect the planned split of Viacom into two public companies before the end of 2005, executives said.

"Paramount will be able to significantly enhance its pipeline of groundbreaking motion pictures - a key strategic objective in restoring Paramount's stature as a leader in filmed entertainment," said Brad Grey, the Paramount chairman who was brought in earlier this year to shore up operations,

In addition to film production, Paramount gains the right to globally distribute movies from DreamWorks Animation SKG Inc., maker of computer animated movies like big hit Shrek.

Under the seven-year deal with DreamWorks Animation, Paramount will earn the same eight per cent distribution fee that had been paid to DreamWorks.

DreamWorks Animation is run by Jeffrey Katzenberg who, with Mr Spielberg and Mr Geffen, co-founded DreamWorks 11 years ago.

Backed by investors like billionaire Paul Allen, the trio aspired to make movies, TV shows, video games and new digital products that would rival Hollywood's grand old studios.

But this deal marks the end of independence for DreamWorks, which had struggled to achieve its dream and already sold off its video game business and paired TV with broadcaster NBC.

While Paramount retains distribution rights to DreamWorks' library, it wants to sell its ownership stake. In a conference call, Viacom co-president Tom Freston valued the library at $850 million to $1 billion.

In a statement, Viacom chief financial officer Mike Dolan said the library sale "allows us to reduce our investment in the transaction." The acquisition overall will add to net income and free cash flow in 2006, Mr Dolan said.

But at least one financial analyst questioned the impact of the deal on Paramount and the sale of the library. As a general rule, film libraries bolster long-term cash flows for studios.

"With Paramount, the thing that was number one was getting its new (film) production act together," independent analyst Rich Greenfield said.