Wall St. Bets on Pixar

Wall Street, having watched one of Hollywood’s great melodramas come to a bitter ending, gave Pixar Animation Studios a thumbs up Friday and Walt Disney Co. a thumbs down.

Pixar’s shares rose 3.4%, closing up $2.19 at $66.39 on Nasdaq. In contrast, Disney shares dipped 1.8%, ending the day down 45 cents at $24 on the New York Stock Exchange.

Friday’s trading gave investors their first opportunity to react to Pixar Chief Executive Steve Jobs’ surprise move to end negotiations with Disney. The announcement was made after the markets closed Thursday.

Pixar was renegotiating the terms of its current deal with Disney. Under the arrangement, the two split the costs and profits of their animated films. Disney also receives a 12.5% distribution fee. Pixar, the maker of such computer-generated hits as “Finding Nemo,” has decided to fully finance future films and keep all the profits minus a distribution fee.

Some analysts attributed Pixar’s stock gain to beliefs that the Emeryville, Calif.-based company could make more money in the long run by retaining control and hiring another studio to distribute its films.

“They might get a better deal than they would have from Disney,” said Lowell Singer, a media analyst with SG Cowen Securities.

Disney’s shares declined, analysts speculated, because the company ultimately stands to lose a reliable profit engine. Merrill Lynch analysts estimated that Pixar had contributed on average more than 50% of Disney’s studio profit during the last five years.

Some of the sternest comments Friday came from the credit ratings industry, which downgraded Disney’s standing more than a year ago for its sluggish performance amid a weak economy.

Analysts with Fitch Ratings said the Burbank-based entertainment giant’s inability to find a way to extend its profitable 13-year partnership with Pixar added to the company’s financial challenges. It also threatened to worsen the “the creative void” in Disney’s animated film business, Fitch wrote.

“This raises questions about whether Disney will have the creative talent to be able to produce box-office hits comparable to Pixar’s,” said Randy Alvarado, Chicago-based director of Fitch’s media group, during an interview.

Reiterating its negative outlook on Disney’s credit, Fitch said it would maintain its BBB-plus rating on Disney’s long-term debt, its third-lowest investment-grade rating.

Executives from Disney and Pixar declined to comment.

Under the current deal, Pixar will deliver two more movies to Disney: “The Incredibles,” which is scheduled for a fall release, and “Cars,” which is set to land in 2005. The two companies have spent much of the last year trying to revise their financial arrangement and extend their partnership. Many thought an agreement was likely.

Instead, Jobs broke off talks. Four of Disney’s Hollywood rivals -- Warner Bros., 20th Century Fox, Sony Pictures Entertainment and Metro-Goldwyn-Mayer Inc. -- have already expressed interest in snaring the distribution deal.

Some analysts speculated that Disney’s stock didn’t take a bigger bruising because Wall Street had not given up hope that Jobs and Disney Chairman Michael Eisner could eventually come to terms.

“There’s some expectation that negotiations could be resuscitated somewhere down the line, “ Singer said.

The two companies teamed up to produce blockbusters “Toy Story,” “A Bug’s Life,” “Toy Story 2,” “Monsters, Inc.” and “Finding Nemo,” the highest-grossing animated movie of all time.

Disney said Thursday that it could not accept Pixar’s most recent offer because “it would have cost Disney hundreds of millions of dollars it is already entitled to under the existing agreement.”

Some analysts agreed.

“It was not a deal that Disney could live with,” said Merrill Lynch media analyst Jessica Reif Cohen.

Disney retains the right to make sequels to Pixar films produced under the current deal and said Thursday that it was going forward with “Toy Story 3.” But company executives said Friday that they had not signed Tom Hanks, Tim Allen and other actors whose voices are so identified with characters that made the franchise such a hit.

In addition, Disney does not own the underlying technology that Pixar used to create the characters in their joint films. As a result, Disney must re-create the millions of lines of computer code needed to bring the characters back to life.

By walking out on Disney, Pixar took a gamble, analysts said.

Singer said, for example, strained relations between Disney and Pixar could jeopardize the companies’ ability to maximize profits on the two films remaining under the current deal.

And there won’t be much room for error.

“While Pixar will realize 100% of the economics of every film after ‘Cars,’ it will also have to finance 100% of the cost of the movies,” said David W. Miller, media analyst with Sanders Morris Harris.

“Now they will no longer have the luxury of sharing the risk with Disney.”

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Associated Press was used in compiling this report.