Indie pic lovebirds lose urge to merge

Intermedia shares drop 63% as Spyglass union fizzles

High-flying indie Intermedia was clobbered on the German stock market Monday after its merger with Disney-based Spyglass Entertainment was called off.

The news sent a shock wave through the indie community. Intermedia has a high-profile year ahead with the release of films “K-19: The Widowmaker,” “Dark Blue,” “National Security” and “Adaptation,” not to mention the production of “Terminator 3.” But the stock’s 63% plunge Monday and the aborted merger raised serious doubts about the company’s ambitious blueprint.

Spyglass’ Gary Barber and Roger Birnbaum and Intermedia’s Moritz Borman, Nigel Sinclair and Guy East reached unanimous agreement this weekend to terminate the transaction, according to a company statement.

Sinclair and East have canceled their previously announced plan to leave the Internationalmedia board of directors to become producers. They will continue in their positions as co-chairmen of Internationalmedia subsidiary Intermedia with Borman.

While the five principals declined to discuss the merger’s failure, Sinclair and Barber failed to see eye-to-eye on several key deal points.

Barber’s vision for Intermedia didn’t include expensive production deals — even for Intermedia co-founder Sinclair, who planned to segue from his role as co-chairman to being an “on the lot” Intermedia producer. Sinclair stood to walk away with tens of millions from the sale of Intermedia stock in his exit, but he has a reputation as a tough dealmaker. When the two sides couldn’t come to terms, both the Intermedia and Spyglass partners decided that the two companies would be better off apart.

The Internationalmedia stock price closed Monday at 7 euros ($6.09) — a 63% drop from Friday’s close and 78% below its initial offer of €32 (approximately $28) in May 2000 — after Intermedia decided to restructure its operations and make a change in accounting procedures. That move was accompanied by a profit warning, startling antsy investors and resulting in the dramatic plunge in Internationalmedia’s share price.

Internationalmedia CEO Florian Bollen said the company’s new accounting methods meant revenue figures would now register after a film’s actual theatrical release as opposed to the pic’s delivery. Intermedia’s year-end figures for 2001 will be presented March 14.

Element of continuity

The accounting move reflects continuity in at least one element of the would-be merger. Spyglass planned to bring its direct distribution model to Intermedia, which historically has relied on presales for financing. Even without Spyglass, however, Intermedia plans to follow the higher risk/reward plan of direct distribution on many of its future pics.

This change in strategy will now be reflected in Intermedia’s accounting methods, which mean that Intermedia will not be able to count any film’s monies until the pic is actually in release.

Intermedia will release the Harrison Ford starrer “K-19” under direct distribution, with Paramount Pictures taking only a distribution fee for its release.

Outlook good

“Nothing has been lost, only postponed,” Bollen said, adding that the outlook for the current year looks good.

Nevertheless, Bollen has accepted responsibility for the failure to reach the company’s annual target figures and offered to resign. The supervisory board is to decide the topper’s fate later this week.

When Internationalmedia announced Jan. 14 that it had agreed in principle to the takeover of Spyglass — a merger that would have created a film company to rival major studios –Internationalmedia was expecting revenue of $260 million and operating profits of around $26 million for 2001. Following the planned merger, it was expecting revenues of around $1 billion.

Internationalmedia was set to give Spyglass $50 million in cash plus 7 million company shares that were then valued at around $140 million. Following Monday’s announcement, the share package plunged in value to about $49 million.

None of the principals would comment on why the merger failed to close, citing legal obligations to remain mum. Those close to the negotiations, however, said the deal was slow to close and lost much of its appeal in the process.

Market hated deal

Certainly Intermedia received no encouragement from the Neuer Markt, which received the merger announcement in January with a 25% drop in the company’s share price.

Local analysts were surprised by the market’s reaction Monday. “What happened to Internationalmedia today was very painful,” said Merrill Lynch analyst Bernard Tubeileh, adding that there appeared to be no logical justification for investor panic.

In the wake of recent stock market disasters, like the collapse of Enron, Internationalmedia’s efforts to adapt new accounting methods and become more transparent should have been welcomed as positive signs, Tubeileh said. That it was seen negatively is evidence of continuing nervousness on the part of investors, he added.

Losses foreseen

The restructuring also will cause one-off charges and postponement of revenues and profits. As a result, Internationalmedia is expecting losses and lower revenues when it presents its year-end figures for 2001 next week.

Intermedia describes its restructuring efforts as preparation “for changing conditions in the international film market and to accelerate its strategy to increase focus on high-profile” film projects.

The acquisition of Initial Entertainment Group, which Internationalmedia announced last year, has not been affected by the latest moves.

Company has a slew of diverse projects on its slate, including big-budget Hollywood productions such as “Basic” and “The Life of David Gale” as well as a biopic of Who drummer Keith Moon.

Intermedia said it would continue to work closely with Spyglass.

(Adam Dawtrey in London contributed to this report.)

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