The UK's Winchester Entertainment has agreed in principle to acquire Cobalt Pictures from owners and founders John Muse and Alton Irby, Winchester announced to the stock exchange on Tuesday.

Winchester and Cobalt have agreed non-binding heads of terms and the transaction is subject to due diligence and an acquisition agreement.

The deal sees Winchester issue Cobalt, the parent company of Cobalt Pictures owned by Muse and Irby, 10% of its enlarged share capital. Cobalt will also be issued with warrants to subscribe for an additional 10% of Winchester.

Winchester will take over Cobalt international sales titles including Open Range, a $42m western adventure starring Kevin Costner, Robert Duvall and Annette Bening, and House Of Sand & Fog, a $25m drama starring Ben Kingsley and Jennifer Connelly.

Cobalt Managing Director Rodney Payne will join the Winchester board on completion of the transaction. Winchester also aims to access additional film financing capital through Muse and Irby, who have partially funded each of Cobalt's films through equity investments.

"This transaction will be a further step in building Winchester's feature film business and will bring in two strong shareholders who are fully supportive of the company's strategy," said Gary Smith, Winchester's chief executive. "We will add to our cash, strengthen our film library with more studio films, and introduce an experienced and highly skilled film financing and sales capability. We look forward to welcoming Rodney Payne to the board and look forward to gaining the benefit of his strong contacts and experience in the industry."

Under the deal, Winchester will earn sales commissions on all future sales on the Cobalt library, as well as a collection fee on all cash collected for sales achieved prior to Winchester's ownership. Cobalt also owns certain distribution rights on Richard Donner's Timeline, along with Swimfan, Danny Deckchair, Shade and Vacuums.

"We have had a long standing relationship with Winchester," said Alton Irby, chairman of Cobalt Pictures. "Our last collaboration was on Heartbreakers, which proved a great financial success for both Winchester and Cobalt. We look forward to more success in the future."

Winchester shares added 1-3/4 pence to 14-1/2 after announcing the deal.