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Hamburg helper

Despite risks, H'w'd harvests German coin

Even their own countrymen are questioning the wisdom of German companies investing millions in Hollywood.

Der Speigel writes: “Viel Geld, Wenig Ahnung” (Plenty of Money, Not Much of a Clue) and speculates about the imminent evaporation of “silly money.”

On these shores, industry insiders wonder about the long-term effects of clinging to European coin like a lifeboat. But a lifeboat it continues to be.

Over the past two years, some two dozen Hollywood producers have inked key equity and/or output deals with foreign partners, adding up to hundreds of millions of dollars.

It’s too early to say whether any of the foreign coin invested in U.S. companies will multiply and bear fruit.

But the vagaries, even dangers, of dependence on overseas financing are already causing observers from Hollywood to Hamburg to look the latest gift horse firmly in the mouth.

Among their concerns:

  • With producers receiving cash and building libraries in exchange for selling off valuable foreign rights, studios may not be inclined to give their product the same attention as those films they own outright.

  • Germany’s Neuer Markt could take a tumble. And if it does, that could cut off Hollywood’s money supply.

  • There may not be enough room in the pipelines for all of the big-budget product that German investors currently demand. And demands for star-driven films could send their salaries skyrocketing further.

  • If German companies face an inability to lay off TV rights in their home countries, that could cripple their financing plans.

  • Next summer’s widely anticipated actors’ and writers’ strikes could halt product flow, preventing German investors from seeing results from their stake in Hollywood.

But for those producers who don’t sprechen sie Deutsch, now’s the time to learn.

Germany has led the charge to fund big American projects, largely because of the instant wealth created by the Neuer Markt, the go-go equivalent of America’s Nasdaq exchange.

And therein lies one of the biggest dangers in this new-money movement. Observers are already muttering about when — not if — the “German bubble” of the Neuer Markt will burst, and who will feel the pain.

In Der Speigel’s recent inquiry into the Teutonic rush to invest in film, Helkon topper Werner Koenig said, “In the new year or next spring there will be an explosion, after which roughly half of the German firms in the market will disappear.”

For now, there seems to be no end to the cash-rich Euros’ eagerness to make production pacts that are much sweeter than U.S. studios’ typical first-look deals.

And for U.S. producers, the money couldn’t come at a better time: With insurance financing mired in litigation, bank facilities drying up, Asia and Wall Street long gone from the scene and studios hanging out the unwelcome sign, the Euro cash is, in fact, a lifeboat.

Every week seems to link another big-name producer — Joe Roth, Mark Canton, Chuck Roven, Francis Ford Coppola — with heretofore obscure foreign partners willing to back their good names with millions (and millions) of dollars in exchange for their savvy in creating star-driven, big-budget fare.

These investments include the $500 million that Intertainment has laid at the feet of Arnold and Anne Kopelson for 10 pictures over the next five years; the 51% stake that Helkon has taken in Chris Ball and Will Tyrer’s Newmarket Group; the tens of millions that VCL has put up for international rights on Woody Allen’s next three pictures; and the nonexclusive, five-year, first-look pact that Gale Anne Hurd cut with Kinowelt.

Not that it’s ever been in Hollywood’s nature to turn away cash, but now is a particularly ripe time for European financiers to play the roles of white knights.

With the European cash infusion, producers who might otherwise have been forced to face severely slashed studio deals — if not leave the lot altogether — are instead boasting healthy development funds, aggressive big-budget production slates and a newfound sense of independence.

Not just the Germans

And the good news is that Germany is not expected to go it alone.

With Spain examining the possibility of launching its own Neuer Markt equivalent, players such as Telefonica could soon step up in a big way.

French giants like Pathe, UGC and Gaumont could also follow the example of leader Canal Plus, and Italian players like Eagle and Medusa have been taking high-level meetings in Hollywood.

“It should be good for the business,” said John Ptak, an agent at CAA. “But obviously, that will depend on the people and the deals.”

However, skeptics note that if you add up all the films that are slated for production through these European pacts, the sheer numbers spell trouble down the line.

“I think there is going to be an overflow of product,” said Graham King, president and CEO at the Splendid-backed Initial Entertainment. “And isn’t it all going to turn out to be junk movie after junk movie?”

Incentives

The reasons for Germany’s eagerness to invest in Hollywood are relatively simple.

For years, German distributors have been forced to sit on the sidelines in frustration as they watched major studios release the American blockbusters their local audiences wanted to see.

For these Teutonic companies, their chances of picking up independent English-language product with big box office potential was next to nil. Worse still, the distrib then had to watch studios make rich TV deals with major German players like Kirch and Bertelsmann.

This overseas set of frustrations is nothing new: It’s what made JVC launch Largo Entertainment in 1989, what helped drive Matsushita to pay $6.6 billion for MCA Universal in 1990 and what led to the creation of companies like Mark Gordon and Gary Levinsohn’s Mutual Film Group with backing from Germany’s Tele-Munchen, the U.K.’s BBC, Japan’s Toho-Towa and France’s UGC-Ph.

A tricky town

These foreign strategies, however, proved to have serious flaws.

The Japanese found they didn’t have the stomach for the topsy-turvy film business. Meanwhile, Mutual’s partners have struggled with a deal that left them handling titles like “Black Dog” and “Hard Rain” while Mutual developed films like “Saving Private Ryan” and “The Patriot” with DreamWorks/Paramount and Sony, respectively. After UGC exited the partnership late last year, Mutual obtained a $200 million revolving credit line so the partners could finance films without studio attachment.

To dodge the errors of their predecessors, today’s foreign investors not only go to the production source but also cut deals that give them plenty of control over what gets made and how the rights are distributed.

The results, they hope, are content libraries that can feed a burgeoning Euro television market as well as the vid and new-media biz.

Still, some contend that controlling product at the source is not enough to ensure success.

Investors are paying a premium for that control, and while German television is a potentially lucrative market, it’s also ruled by a powerful handful of companies that are not inclined to overpay for their product.

One only has to look at the scenario currently faced by Kinowelt, which paid a whopping $300 million last year for a package of TV rights on 70 Warner Bros. titles, outbidding a joint offer by Kirch and Bertelsmann.

However, with no television stations to call its own, Kinowelt soon found Kirch and Bertelsmann to be disinterested buyers.

“Only so many people will sell off rights to those pictures,” said Ashok Amritraj, a partner with David Hoberman in Hyde Park Entertainment, which has a first-look deal at MGM, a second-look pact with Disney and backing from Epsilon, the media consortium formed between Germany’s Kirch and Italy’s Mediaset. “It’s a big game the Germans are playing and a dangerous one.”

Posing a strike

Several observers said the pin that could prick the bubble is the pending strikes by actors and writers. If Hollywood productions stop, the theory goes, so would the deal announcements that keep some Neuer Markt stock prices up.

For deep-pocketed companies such as Constantin Film, a strike would be an annoyance; for upstarts like Advanced and Intertainment, it could be catastrophic.

“All of their projections will be out the window if they can’t meet their numbers and their revenue goals,” said Intermedia co-chairman Mortiz Borman. “And if they can’t reach those, the analysts will not be happy.”

But for the time being, the odd courtship between Germany and Hollywood is still growing stronger: Shingles such as Interscope, Imagine Entertainment, Castle Rock, Industry, Anonymous, Alcon and Centropolis are inching ever closer to that coveted Euro cash.

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