Harvey Could Be A Free Man This Fall
By Kathleen Sharp

(FORTUNE Magazine) – Hollywood's favorite obsession of late has been speculating about the future of the movie world's odd couple: Harvey Weinstein and Michael Eisner. Everyone knows that the Miramax chief, like Pixar's Steve Jobs, is unhappy with the constraints put on his studio by the Disney boss. But unlike Pixar, where negotiations are on hold, it looks as if Eisner and Weinstein could reach an agreement that makes Harvey a free man by October.

In preparation for that day, Miramax in mid-August trimmed its workforce by 15%. Says Miramax spokesperson Matthew Hiltzig: "The layoffs have nothing to do with any negotiations with Disney." Ah, but they do. They lower overhead, making Miramax more attractive to outside investors--which Harvey will need whether he succeeds in buying back the Miramax name or he's forced to start a new studio.

For those who haven't followed every twist and turn of this drama, Miramax has been part of Walt Disney Co. since 1993, when co-founders Harvey and Bob Weinstein sold their art-house production firm for $75 million. Disney gave Miramax marketing muscle and as much as $700 million a year to make movies. Miramax gave Disney some 50 Oscars and, most recently, about $200 million in annual operating profits. The bulk of that came from Bob Weinstein's unit, Dimension Films--which produces moderate-budget hits such as Spy Kids and Scary Movie.

The freewheeling Harvey, however, strayed from his low-budget roots, developing expensive box-office duds such as The Gangs of New York and Cold Mountain. "These films do not make money for Disney shareholders," said David Miller, an analyst with Sanders Morris & Harris. Disney CEO Michael Eisner tried to rein in Harvey's growing ambitions, while Harvey chafed under the control of Eisner and Disney's fiscal managers.

Back in the mid-1980s, Disney built Hollywood's first strategic-planning department by luring top MBA graduates, including eBay's Meg Whitman; Richard Nanula, the CFO at Amgen; and Peter Murphy, now Disney's senior executive vice president--and Eisner's right-hand man.

When relations between Eisner and Harvey soured last year, it was Murphy who stepped in to manage the maverick producer. Murphy delivered Disney orders to parse budgets, meet double-digit growth projections, and shrink compensation packages. By spring Miramax executives were grousing that they wished the strategy planners "would just leave us alone." As one Miramax manager said, "They squeeze people and don't reward them for jobs well done."

There were also discussions about renewing the Weinsteins' employment contract, which expires in September 2005. But things turned hostile in May after Eisner declined to reconsider his refusal to allow Miramax to release the documentary Fahrenheit 9/11. Miramax made a distribution deal with Lions Gate and IFC Films, the $6 million film went on to gross $115 million (so far), and Weinstein was ready to walk.

Leaving Disney would not be simple. Miramax has a 600-film library and an estimated value of $2 billion, so Harvey would have to leave his company behind or buy a chunk of it. Once Miramax's contract expires, Disney does have the option to renew it at the same terms for four more years, but there's little chance that will happen.

What will probably happen is that Disney will keep Dimension Films and give Bob Weinstein about $350 million to make six or so films a year. Harvey wants to leave Disney, take key members of his staff, and continue producing his own movies under the name Miramax, which Disney now owns. He and Disney are likely to reach some sort of deal whereby Disney gets the first look at his projects in exchange for some financial support. That just leaves Disney's favorite sticking point--money. The expansive Harvey is hoping for a multimillion-dollar payoff to buy out the last year of his contract; Disney wants to pay him as little as possible. If they do reach an agreement, Harvey's next task will be to round up private investors to help underwrite his big-screen ambitions. The irony? The Disney-mandated cost-cutting could end up making any deal far easier for Harvey to sell.

--Kathleen Sharp