Strapped studio seeks insurance coin for productions
Under mounting pressure to kickstart its feature film activities, MGM is seeking off-balance-sheet financing. The studio is currently negotiating an insurance guarantee deal to stretch its production financing, according to sources.
MGM has approached London insurance brokers C.E. Heath & Co. about guaranteeing production financing for at least one and perhaps four of its films, including the upcoming Richard Gere starrer “Red Corner,” the $48 million project greenlit for a mid-March start. The arrangement, if concluded, would be a form of credit enhancement enabling the studio to gain additional bank financing for film production.
MGM had no comment. But an industry source said, “A deal between MGM and an insurance syndicate led by Heath & Co. is imminent.”
That would be a welcome boost to MGM. The company will be operating over the next 12 to 18 months without any substantial revenue from its film division, the studio’s main engine. At the same time, it is carrying an annual overhead estimated at $150 million.
MGM chairman Frank Mancuso has consistently maintained that with cash flow from operations, the $350 million credit line extended to MGM from investment bankers J.P. Morgan last October is sufficient for studio production plans.
Execs at Heath, which has a similar arrangement with Sony-based Phoenix Pictures and another at Paramount with 7 Arts’ Peter Hoffman, confirmed ongoing meetings with MGM on the multipic deal.
The move to find off-balance-sheet production coin comes in the wake of several setbacks for MGM, where sources close to the company say the mood has sobered considerably since the emotional high of its buyout last fall.
MGM has been relatively inactive since Kirk Kerkorian and Seven Network bought the company for $1.2 billion. Although a handful of small deals have been struck, several agents who do business with the studio said that MGM is not yet up to speed. Besides “Red Corner,” the studio has greenlit only the new James Bond film, now expected to start April 1 for a Christmas release. The studio has only one release of its own until November, the $30 million “Hoodlum” from producer Frank Mancuso Jr. It will release three other films, but they are all pickups.
The studio is still trying to kick-start its production activities, and as a result other divisions have come to a standstill. “Everything has slowly ground to a halt. First it was production, then it was marketing and distribution. It’s only a matter of time before homevideo feels it too,” one insider said. “They’re paying marketing and distribution to sit and do nothing. Production is trying to move forward, but at this rate, it’s going to be a year before anything is released.”
Two high-level MGM execs acknowledged that the studio has been “a little slower” getting back into film production than expected.
Several factors have cast a shadow over the Lion’s den, beginning with delays on “Bond 18,” a franchise on which MGM is banking heavily. The delays are partly due to star Pierce Brosnan, who was injured during filming on “Dante’s Peak.” Sources note that the “Bond 18” budget is higher than expected, and the script is also into its third rewrite, now with writer Daniel Petrie Jr. The second unit has started shooting this week in the Pyrenees, but principal lensing will not start until April.
In another blow, overseas video sales on “Goldeneye” in the U.K. and elsewhere grossly underperformed. However, the video issue of “The Wizard of Oz” has surpassed expectations domestically. Insiders also say that the studio is shouldering millions of dollars of startup costs from MGM Gold, the studio’s Asian satcast venture. The launch last August was three months behind schedule, studio sources confirmed.
On top of that, box office for all of the studio’s recent releases has been below projected revenues.
According to documents obtained by Daily Variety, MGM management projected box office receipts on “Larger Than Life” (starring Bill Murray and an elephant) to be $80 million; it only grossed $8.3 million. Likewise, “Fled” was expected to make $100 million and grossed only $17.2 million. The same projections peg the upcoming Laurence Fishburne gangster pic “Hoodlums’ ” gross at $78 million.
Those management-devised projections were provided to the buyers when the entertainment company was put up for sale.
A recent blow was the exit of Mike Hope, Mancuso’s top financial adviser. His departure has presented an opportunity, sources say, for MGM’s shareholders Seven Network and Kerkorian’s Tracinda Corp. to have more input into the financial management of the company.
While a headhunter has been hired to find a new chief financial officer, insiders say, many observers on Wall Street expect the real financial decisions to be made in future by Seven CEO Kerry Stokes and Kerkorian’s right-hand man and MGM board member Jerome York.
Stokes and York are said to have been unimpressed with the situation they have encountered at MGM. Although insiders say both sides are eager to make their investments work, Stokes and Kerkorian differ on method, with Kerkorian urging caution and patience. Speculation has been swirling that Stokes is looking at exit options, although Seven insiders deny that he is ready to sell his $320 million investment. Stokes has, however, expressed anxieties about his investment to associates.
One source said Kerkorian has become more aware that the studio has heavy overhead and doesn’t have the capital to do what it needs to do. Tracinda execs did not return calls.
Management regarded the acquisition by Tracinda/Seven Networks as a welcome alternative, however, to other possible deals. Sources said that other players – which included Polygram and the Warner Bros.-backed Morgan Creek and Arnon Milchan bids – would have cut overhead down to around $35 million, leading to massive layoffs.
Bankers have been predicting almost since Kerkorian and Seven’s acquisition of MGM closed last October that the studio would have to raise new money within a year or two, although people close to MGM flatly deny any problems and attribute any morale dip to “post-partum blues” following completion of the studio’s sale.