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Surviving the Weinsteins
Disney chief can afford to lose the Miramax founders or Pixar, but not both.
June 7, 2004: 10:01 AM EDT
By Krysten Crawford, CNN/Money staff writer

NEW YORK (CNN/Money) - Despite Michael Eisner's pollyannaish take this week, the chances of The Walt Disney Co. and Pixar Animation Studios finding their way back to the bargaining table are slim at best.

That means all eyes are on Bob and Harvey Weinstein, the marquee names behind Miramax.

Eisner, the beleaguered Disney chief, might be able to make do without Pixar. But he can't survive the loss of Pixar and the Weinstein brothers.

"Then you have a significant loss," said David Mantell, a media and entertainment analyst with Loop Capital Markets.

Eisner hasn't lost the Weinsteins yet, although tempers are flaring between the two sides over a new employment deal. A source close to Miramax said that the Weinsteins are willing to buy back Miramax if talks fail.

And Eisner has indicated he's open to the idea, according to Monday's The New York Times. The Disney CEO has taken a lot of heat recently over Disney's refusal to distribute Miramax-funded "Fahrenheit 9/11," the anti-Bush documentary that took home the Cannes Film Festival's top prize last month.

For all the jockeying, there's still plenty of time for compromise before the Weinsteins' contract ends in 2005.

But if talks with fall through, the twin losses of Pixar and the Weinsteins would be a hit to Disney's income stream and yet another black eye for Eisner. "If they both disappear that's huge for the division," said Paul Kim, an analyst with Tradition Asiel Securities. For Eisner, it would "not be good," he said. "Like the [U.S.] president, you can't have too many political collateral losses."

Last year was phenomenal for Disney's movie studio arm, which includes ownership of Miramax, Walt Disney Pictures, Touchstone Pictures and a partnership with Pixar. Operating income more than doubled to $620 million, the biggest leap of Disney's (DIS: up $0.15 to $24.21, Research, Estimates) four main business lines and one-fifth the company's $3.2 billion in operating income.

About $300 million of that $620 million came from Pixar, which came out with the record-grossing animation flick "Finding Nemo," and Miramax, which posted a record year thanks in part to "Chicago." Kim projects that this year, Pixar and Miramax are on track to deliver more than half of the film division's operating income, which could reach $850 million.

Disney officials, however, downplay the threat posed by a Weinsteins exit or the end of a Pixar deal, citing other production deals and prospects.

But though Disney wouldn't be able to count on such big contributions each year from Miramax and Pixar, it would be tough to compensate for their absence.

"All of the pistons would have to be firing," said Mantell. So far, Disney's other film divisions are off to a slow start, having released a series of duds led by "The Alamo." And for the first time in years, Disney doesn't have an animation film for this summer.

Cash cow?

Of Pixar and the Weinsteins, analysts said Pixar's loss would be the more damaging financially.

Disney and Pixar (PIXR: down $0.06 to $66.75, Research, Estimates) first teamed in 1991 when the two companies cut a production deal whereby they would split the costs and profits from five animated feature films. Disney retains the rights to the films' library and to proceeds from sequels. The venture has been a tremendous boon to both Disney and Pixar, beginning with "Toy Story" in 1995, its sequel, "A Bug's Life," "Monsters, Inc." and "Finding Nemo." Two more films are due out, "The Incredibles" later this year and "Cars" in 2005, before their deal officially ends.

Prudential Equity Group estimates that, by the end of 2006, Pixar films will have generated $1.9 billion in profits for Disney -- or almost $200 million a year on average.

Neither Disney nor Pixar has since lined up another major partner, although Disney has signed deals with lesser-known computer animation shops like Vanguard Films, which produced "Shrek" and its blockbuster sequel.

"Pixar's success is bringing a lot of other entrants into the marketplace," said one analyst who, citing a company policy, could not speak on the record. "Who knows if they'll be as good, but they do take away a little of the risk to losing Pixar, and offer a potential upside."

Bad rep

If the Weinsteins go, the blow would hit Disney's image more than its pocketbook. "It would be just another in a string of deals where Eisner is seen as being emotional, pig-headed and egotistical," said the analyst who requested anonymity.

In 1993 Disney bought Miramax, then a small but reputable maker of independent films. The deal gave Disney an entree into films with more adult themes that Disney would otherwise be reluctant to put under the same banner as Mickey Mouse. The Weinsteins, who continued to run the studio they founded in 1979, have since churned out a steady stream of blockbusters and Oscar winners, among them "Shakespeare in Love" and "Chicago."

In May, Eisner told analysts that Miramax has been profitable only 2 of the last 5 years. But a Miramax official insisted the studio has made money consistently over the past decade.

A source close to Miramax said the Weinsteins are looking to buy back Miramax. Failing that, they're willing to split off and launch a new studio with different backers if necessary. Disney would retain the rights to the Miramax name and its library. But analysts said that because the studio's main assets are the Weinsteins, their exit could effectively gut Miramax.

Disney, Walt, Co
Michael Eisner
Harvey Weinstein

"With the relationships Miramax has built up in the industry, the kind of scripts they can get, the actors who will work for them, [the loss would be] more of a reputation loss," said Kevin Calabrese, an analyst with Argus Research Corp. "Financially, I think Disney would make up the difference," he said.

Although Pixar and Miramax have been jewels in Disney's crown, company officials expressed optimism that projects in the pipeline will perform well, starting with this summer's back-to-back release of "King Arthur" and "The Village."

On top of its new production deal with Vanguard, Disney is also working with other small film developers and its own animation unit plans to release 20 3-D films, beginning with Chicken Little next year.  Top of page

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