As anticipated, independent powerhouse Intermedia has signed an agreement to merge with Gary Barber and Roger Birnbaum's Spyglass Entertainment. This creates an entity with an annual output of major movies as big as any studio and bringing The Walt Disney Studios (TWDS) into the company as a shareholder and potential distribution partner.

Spyglass will operate autonomously alongside Intermedia, Graham King's Initial Entertainment Group (IEG) and the smaller production outfit Pacifica under the Internationalmedia AG banner, the Munich-based holding company which is publicly listed on Germany's Neuer Markt. The deal should be completed by the end of February at which time the new shareholding structure will be made public.

As part of the arrangement, Barber and Birnbaum join the management board of Internationalmedia and become major shareholders and co-chairmen with Moritz Borman. They will manage the worldwide operations of the Intermedia/Spyglass group.

Borman is now sole chairman of Intermedia, since, as anticipated in Screendaily (Dec 21), current board members Nigel Sinclair and Guy East will step down from their current positions as co-chairmen and leave the board. But the two, speaking in Park City yesterday, stressed that they would remain with the company as consultants and producers; Sinclair based in the Intermedia Los Angeles offices and East at Intermedia London. While they would not comment, it is understood that they are selling most of their shares in the company which should net them tens of millions of dollars each.

"We set out to build this company up five years ago and that is what we've done," said East. "We will remain as shareholders, consultants and producers but we are retiring from active management." Sinclair said he would see through films which he initiated at Intermedia before starting producing, while East will seek out European projects in Europe. They said that they had not decided yet whether they would formalise their axis into a production outfit.

Meanwhile Sinclair said that with Spyglass on board, the group was nearing its target of delivering between 18 to 22 major movies a year - a volume of pictures which would theoretically help the company reach its 2001-2 sales target of $312m for the year. The group's profits are principally derived from distribution fees, production fees and overages which can only be generated by keeping a high volume of films. With Spyglass, for example, comes two completed films (The Count Of Monte Cristo and Dragonfly), two in post-production (Abandon and Reign Of Fire) and two in production (The Farm and Shanghai Knights). When Intermedia bought IEG, it is understood to have earned up to $10m worth of overages from Traffic. If, as is now likely, the sales target is met, the group's share price should be protected.

As for Intermedia itself, it is close to delivering a slew of pictures including Plague Season, National Security, K:19 - The Widowmaker, The Quiet American and Adaptation. "We released about 12 films last year," said Sinclair, "and we have seven in post. This year we should have about 20 films and another 12 will make it into production. The combined group should therefore be delivering as many films as a studio." East added that Intermedia's library is now at about 120 movies including titles from Intermedia itself and acquired libraries from Mayfair Entertainment International and Largo Entertainment.

The company's biggest picture to date - Terminator 3: Rise Of The Machines is also being readied for production in Vancouver this year, with deals recently closed with Warner Bros domestically and Columbia TriStar Film Distributors International for international rights. The Warner deal is said to have been worth $50m, the Columbia TriStar deal $70m. As to the budget of the film, it is reported to be as high as $170m.

The deal essentially makes Spyglass a public company, a strategy it had been pursuing independently on the Neuer Markt last year before the market's appetite for entertainment companies nosedived. Ironically, while other share prices tumbled, only International Media has remained resilient.

Spyglass's deal with Disney for domestic and much of international distribution remains in place and is unaffected by the merger as is its deals with KirchMedia in continental Europe, Canal Plus, Svensk Filmindustri and its other international partners. The exact percentage Disney now has in Internationalmedia - inherited from its equity stake in Spyglass - has not yet been disclosed, but the association could be crucial for Intermedia which has crucially lacked a domestic distribution ally. Its costly John Travolta drama Basic, for example, still has no US distributor attached.

"There is no official first look deal," explained Sinclair, "but obviously Disney will enjoy the relationship with the company it should as a shareholder." And in the statement announcing the merger, Dick Cook, chairman of The Walt Disney Motion Picture Group said that Disney was "excited with the new Intermedia/Spyglass group. We look forward to continuing and expanding our relationship with the merged companies."

The Intermedia/Spyglass group now boasts a wealth of Hollywood ties, not least of which is the Birnbaum/Barber team which has enjoyed success together at Spyglass (The Sixth Sense, Shanghai Noon) and separately - Birnbaum at Caravan Pictures and 20th Century Fox, Barber at Morgan Creek.

Graham King brings deals into the group with Catherine Zeta-Jones' Milkwood Films and Leonardo DiCaprio's Appian Way, while Intermedia now has first-look deals with Mirage Enterprises (Sydney Pollack & Anthony Minghella), Baltimore/Spring Creek Pictures (Barry Levinson & Paula Weinstein), C-2 Pictures (Andy Vajna & Mario Kassar), Grande Via (Mark Johnson), Outlaw Productions (Bobby Newmyer & Jeff Silver), Saturn Pictures (Nicolas Cage), Trigger Street Productions (Kevin Spacey), Lucid Film (Ryan Philippe), Type A Films (Reese Witherspoon) and Ultra Films (Kate Winslet) as well as a second-look deal with Ridley & Tony Scott's Scott Free Productions.

Euro Capital Advisors, led by Mark Dyne, were the exclusive facilitators of the Spyglass/Intermedia transaction.