McD's adds to Disney distress

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As if he needed another headache, Walt Disney Co. CEO Michael Eisner has now lost the confidence of a major marketing partner, McDonald's.

The tie-in partner is exploring deals with rival studios, a move that comes after Mr. Eisner was stripped of his chairman title last week when 43% of Disney shareholders withdrew their support for him. Disney also still faces a takeover threat from Comcast Corp. as it struggles to regain its lost magic.

McDonald's is distressed over Mr. Eisner's failure to reach a new agreement with powerhouse Pixar Animation Studios, Advertising Age has learned. Like Pixar, the fast-food chain has approached other studio partners, including Sony Pictures and Warner Bros., according to two executives close to the situation. Sony declined to comment; a Warner Bros. spokeswoman said she was not aware of any talks with McDonald's.

While Pixar was not originally part of the Disney/McDonald's alliance, an executive familiar with the deal said Pixar was written into the agreement. Since McDonald's contract with Disney expires in 2006, it's now sweating whether the relationship should proceed under its current exclusive terms without Pixar. It also fears losing the red-hot Pixar franchise to its arch rival.

"Giving up Pixar is huge," said an executive close to Burger King, which had been foiled by the exclusive Disney/McDonald's deal. "It really opens up an opportunity for us."

While Pixar will produce two more films under its Disney deal, it's looking for a new distribution partner and is said, perhaps not so coincidentally, to be talking to both Sony and Warner Bros. "We wouldn't discuss any negotiations," said a McDonald's spokeswoman. "We have a great working relationship with Disney." Pixar declined to comment.

Disney said it has a "mutually beneficial" and positive agreement with both McDonald's and Pixar.

Dissident shareholders Roy Disney and Stanley Gold, who resigned from the Disney board and have called for Mr. Eisner's resignation, blamed him for the talks with Pixar CEO Steven Jobs falling apart.

McDonald's is caught in the middle. Its pact with Disney, which took effect in January 1997, is estimated to be worth between $2 billion and $3 billion in promotional value and royalties.

hand-wringing

McDonald's has complained in recent years about Disney's under-performing kid movies such as "Treasure Planet" and "Atlantis," and has had the most sustained success with Pixar juggernauts such as "Finding Nemo," the best McDonald's tie-in since 1995's "The Lion King."

With roughly half of Happy Meal promotions supporting Disney projects, the fortunes of McDonald's ride heavily on the quality of the films. Up until "Lion King," several of the Disney promotions flopped. By contrast, Disney's Pixar films including "A Bug's Life" and "Monsters, Inc." fared well for McDonald's.

Though the 10-year contract with Disney doesn't expire until 2006, and there is a chance Pixar could come back to the negotiating table, there is still considerable hand-wringing. "McDonald's knows that Pixar has had the hits," said an executive close to McDonald's. "So the question is: Do you pick for longevity or for the future?"

Moreover, Disney's recent appointment of a McDonald's competitor to its board could also influence the fast-feeder's decision to renegotiate with the entertainment giant, said Dick Adams, a former McDonald's operator turned consultant.

In January, Aylwin B. Lewis, president-chief operating officer of Yum Brands, the parent of rivals Taco Bell, Pizza Hut and KFC, joined Disney's board. "The Disney `alliance' has nearly three years to run," Mr. Adams wrote in a bulletin to franchisees. "Is this conflict of interest, and other turmoil at Disney, an opportunity to modify the `alliance"'?

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