Union of Intermedia, Spyglass means deep pockets, big slate

LONDON — The merger of Intermedia and Spyglass Entertainment will create an independent company with the capital and ambition to rival many studios.

With Intermedia providing a listing on the Neuer Markt and access to German film funds, and Spyglass contributing a $200 million credit line and its special relationship with Disney, the combined company will draw on formidable resources to bankroll a slate of up to 20 movies a year.

Yet Intermedia’s share price slumped by 24% as investors reacted to news that the company would miss its revenue forecasts for 2001, and that its two founding execs, Nigel Sinclair and Guy East, were quitting the board.

Both those announcements obscured the positive message Intermedia was hoping to send about the deal, which will push the merged company into a league of its own between the studios and the indie sector.

Word is: ‘Buy’

Frankfurt analysts rallied with strong buy recommendations as the underlying story started to filter though, but this wasn’t enough to shift the stock price back up. The marriage clearly smacks too much of Hollywood’s mysteries for German investors to be yet comfortable with it.

The revenues, which slipped from 2001, have not been lost; they will simply be booked instead in the first half of 2002, following post-production delays after Sept. 11 on some unspecified movies.

Sinclair and East, meanwhile, are segueing to new production roles, but the shares they offload — and it is not yet clear how much each will sell of his 12.2% stake — will remain within the magic circle of the board, rather than being traded on the open market.

Intermedia is paying $40 million in cash plus 7 million new shares to acquire Spyglass, in a deal worth roughly $150 million at current prices. That’s about six times the projected 2002 earnings of Spyglass.

“From a purely numbers point of view, it’s a good deal, not at all expensive,” comments Merrill Lynch analyst Bernard Tubeileh.

Founders’ share

That gives Spyglass co-founders Gary Barber and Roger Birnbaum, who are joining the board in place of East and Sinclair, roughly 15% of the company, before they buy any shares from the exiting duo. The minority Spyglass shareholders, including Disney and Telemundo, will share 4%.

The merged group predicts 2002 revenues of $854 million, comprising $374 million from Spyglass, $400 million from Intermedia and $80 million from Initial Entertainment Group — which Intermedia recently bought for $40 million.

So much for the financial details. What matters more in Hollywood is who’s running the show? Which team, Intermedia or Spyglass, is calling the shots?

Separate brands

The answer, for now and at least the next 18 months, is to run Intermedia and Spyglass as two separate brands, reporting to a single board. Intermedia chairman Moritz Borman remains the ultimate power, largely because he’s the one with the inside track to all that lovely German money.

Backroom operations such as collections and delivery will be consolidated, but the two companies will continue their autonomous production and marketing operations.

That means Birnbaum will call the shots creatively at Spyglass, while Intermedia’s head of production Basil Iwanyk will continue to report to Borman.

The companies also will continue with their two distinct models of production financing. Intermedia makes a dozen films a year by pre-selling rights to distribs worldwide, a risk-averse model with limited upside. On average, two or three films a year go into overages (such as “The Wedding Planner”), and the company gets to build a library.

Spyglass funds three to four films a year through its J.P. Morgan Chase bank facility, and distributes through its exclusive distribution deal with Disney, which runs to 2003. It also has pay TV deals in Europe with Canal Plus, Sogecable and Kirch Media. All of this means greater risk on fewer movies, but greater rewards.

Complementary models

The two models are being pitched as complementary: Spyglass provides the upside, Intermedia the security. “The higher risk we are taking on with Spyglass is ameliorated by the critical mass we are gaining with the merger,” says one Intermedia insider.

Meanwhile, after conjuring Intermedia Film Equities from thin air in 1996, merging it with Borman’s Pacifica in 2000 and then launching a $1 billion IPO, East and Sinclair are seizing the chance to cash in some chips and change their pace.

L.A.-based Sinclair will segue to a production role under an exclusive three-year deal. A packaging lawyer by background, he has adopted an increasingly active creative role in the past year, with a hands-on involvement in pics such as “K-19: The Widowmaker” and “Enigma.”

Ubiquitous presence

Sinclair is attached to eight projects on Intermedia’s slate, including a biopic of Who drummer Keith Moon that he has been developing for years with the band’s lead singer, Roger Daltrey. He also will work closely with Iwanyk and Borman to push 20 projects at advanced stages of development into production.

East will continue to scout for European projects from his London base. He has recently brought in three movies from his local contacts — two remakes, “Sleepwalker” from Norway and “The Experiment” from Germany –and the British project “Me Again,” picked up in turnaround from Working Title.

Intermedia is at pains to squelch speculation that its commitment to European production is wavering, thanks to its increasing focus on big-budget Hollywood pics such as “Terminator 3,” “Basic” and “The Life of David Gale.”

In recent months, the company has iced two prestige Euro projects — “The Girl With the Pearl Earring” and “The Assumption of the Virgin.” The former was put into turnaround because Intermedia judged the budget too high for market demand. The latter went into hiatus when Benicio Del Toro failed to agree on the script with helmer Walter Salles, though Intermedia is working with producer Mirage to repackage it.

The strategy for the merged company includes an aggressive expansion into television production, growing its nascent record label (drawing particularly on Birnbaum’s roots in the music biz), and acquiring other shingles and libraries.

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