Facing ever-rising costs and always high risks, Hollywood is back on the prowl for outside investors to put money into film production.
Despite the fact that Viacom and Sony are leading the charge, the quest will be tougher than in previous years. Tax law changes in the past 15 years have killed off most tax-shelter investment deals for the film industry. Among the majors, only Disney has continued to be able to tap the public markets for funds.
Without tax advantages, most studios find it cheaper to raise production money themselves, bankers say, particularly when co-financing means giving away some of the upside potential.
And most execs strongly resist selling off foreign territories for upfront cash, a popular method of co-financing in the past, because overseas markets are one of the biggest growth areas.
“We believe strongly in co-financing,” says MCA motion picture group chairman Tom Pollock, “but we don’t believe the best way of doing it is to sell off rights. We never sell off foreign, except in rare instances. We think that the foreign area is the primary growth area. When it comes to foreign, we’re in the acquisition business.”
Warner Bros. and 20th Century Fox are both aggressively looking to buy foreign rights. Fox filmed entertainment chairman Peter Chernin says that overseas, “We are not selling rights, we are buying them. We would have preferred to own ‘True Lies’ around the world.” (Universal had some foreign rights to the film under its deal with director James Cameron.)
Much of the renewed interest in co-financing is coming from the New York headquarters of Paramount’s parent, Viacom Inc., and from Sony Corp. of America, although some key Hollywood execs have misgivings about the strategy. With a heavy debt load from the Paramount takeover, Viacom has vowed to increase the studio’s film output without spending any more money. “We will get there by more co-financing,” said Viacom CEO Frank Biondi at a recent media conference.
Sources close to Viacom say the company was “looking at all of the alternatives… where the economics are clearly to the benefit of doing it,” including sealing deals with producers Steve Reuther and Michael Douglas and raising public money for production if the public markets were willing.
Viacom entertainment group chairman Jonathan Dolgen has a long track record in co-financing. “He did it at Columbia and Fox. When he moved into Paramount, it was inevitable that he would do it there,” one banker said.
A different attitude
Paramount was one of the few studios that had made a point of financing its pictures almost exclusively in-house in recent years, particularly under the management of Martin Davis. Viacom is keen to tell Wall Street that the new management has a different attitude, sources say. “They will look at clever deals in any way they can,” said one source.
After a $2.7 billion writeoff on Sony Pictures, Sony Corp. of America’s new exec VP Jeff Sagansky has let it be known that the studio wants to do more co-financing to bring its spending under control. Columbia has a split-rights deal with Paramount on “The Indian in the Cupboard,” although Columbia prexy Lisa Henson says “‘Indian’ was a unique opportunity.”
Paramount is sharing the risk with Columbia after special effects pushed the budget on the project to about $45 million. Under terms of the 50/50 split, Columbia will co-finance and distribute overseas and will retain international pay TV and domestic video rights and free TV. The two will share equally in all revenues for “Indian in the Cupboard.”
“If more opportunities come along like that, we may take them up, but we’re not planning to sell our own movies. We do have strategic partnerships in place to do some films. Look at Beacon (Communications, which has a deal with Sony) or Castle Rock (which has a distribution deal with Columbia),” Henson said.
Henson added that, while Columbia planned to make some expensive films this year, “we haven’t planned to co-finance.”
Still, TriStar did split the rights on “Mary Shelley’s Frankenstein” with Dan Melnick’s IndieProd. TriStar put up only $21 million in production costs, so it didn’t take as big a bath on the picture as it might have.
At MGM/UA, financial pressure also makes such deals more attractive. MGM/UA chairman and CEO Frank Mancuso says, “We have always looked at co-funding as a possible option. We will continue that philosophy.” Mancuso said MGM has not done any specific deals with anyone but is looking at the arrangements project by project.
In the past, 20th Century Fox has raised money from foreign investors through tax-shelter partnerships. But Chernin says Fox has moved away from co-financing. “Our guiding philosophy is that if we believe in a movie, we would like to control as many rights as possible. We are not overwhelmingly in the risk-aversion business,” he said.
Another Hollywood veteran who’s skeptical about the industry’s new zeal for co-financing is Barry Diller. When he headed Paramount (in the ’70s and ’80s), Diller brought in partners for only a few select projects, such as Warren Beatty’s “Reds.”
“Co-financing only made sense when the tax advantages created extraordinary opportunities for distributors. Disney was able to take advantage of such opportunities because of its brand name.”
No tax benefits
Diller said most co-financing arrangements did not really make sense any more “because the nature of the business today is that margins have decreased. Hence, when you have a hit, you must be able to retain the full profitability of that project.”
Without tax benefits, most studios are willing to raise funds from outside investors only on terms that are usually unacceptable to investors, bankers say.
Studios “would rather use their own capital or debt-finance it at a lower rate. They have their balance sheet they can leverage and utilize to get cheaper cost of finance than going outside,” one banker says.
Raising money from investors for Hollywood has been “a sucker market,” says another banker. “Not a lot of money has been made. It’s a ‘heads I win, tails you lose’ type of situation where the studios always seem to get their money out, and if the thing is a big hit, you make T-bill rates, and if it’s a bust, you lose your money.”
“It’s no place for amateurs,” says Walter Forbes, chairman of home shopping company CUC Intl., who personally invested money in the development of “In the Line of Fire.” Forbes won’t say whether he also put money into the film’s production or whether he has invested in any other pictures.
He does say, however, that his involvement with “In the Line of Fire” arose out of a friendship with a person in the film industry. He adds that investing in films is not something he would do on a regular basis. “I don’t think outside investors have that great a chance of making a lot of money,” he adds.
Forbes is typical, say some bankers, of wealthy individuals who are occasionally offered the chance through social networks to invest in pictures on a one-time basis. One banker said there will always be people like Forbes who are willing to put money into films for “non-economic reasons.”
Disney has continued to tap public markets despite the death of tax shelter deals, even while tightening the terms of its deals.
Disney first raised public money through the Silver Screen partnerships in 1985, when the company’s new management was beginning to ramp up film production. In several offerings between 1985 and 1991, Silver Screen raised more than $1 billion for Disney from 140,000 small investors, but it quit raising money for the studio in 1991 because Disney hardened its terms, says Tom Bernstein, exec VP of Silver Screen Partners.
Silver Screen’s original agreement with Disney included film-by-film guarantees, ensuring investors plenty of upside on hits and only the loss of interest on duds. But by 1990-91, Disney had become such a successful studio that it wanted different terms.
Disney raised co-finance from Japanese partners in a deal that ended poorly for the investors when the films flopped. In the past two years, Disney has raised almost $900 million in two private placements of securities with institutional investors, deals that offered participation only in the studio’s poorly performing live-action films. Disney is now considering another such issue.
Bernstein says Silver Screen has stayed out of film financing since 1991, despite approaches from other studios in the past few years.
“We would only do it if we could get some comparable arrangements” to its original deals with Disney, he said.
Anita M. Busch, Dan Cox, Jay Greene and Beth Laski contributed to this report.