H'wood increasingly looking outside to raise pic coin
A studio head is asked to be tastemaker, seer, psychologist and enforcer — and can now add “fundraiser” to the job profile.As Hollywood copes with rising costs, studios are increasingly tapping outside money to help bankroll their pics, hitting on sources ranging from the billionaire boys club to hedge funds and blue-chip investment banks. Right now, that cash is plentiful and Wall Streeters predict it will keep flowing — at least until someone loses their shirt. These funders are being hailed as heroes. In the past, some studios like Paramount were criticized when they sold foreign rights to reduce risk, because they were also reducing profitability. Current outside-funding deals aren’t giving away rights, and they’re bringing in major profit participants. The flavor of the month: deals that commit to a slate of films. A principal puts in some cash and gathers a group of investors to fill the rest of the pot, usually some combination of hedge funds, pension funds, insurance companies, private-equity firms and “high net-worth individuals,” as they’re called. A hedge fund is a wide-ranging term for a private investment partnership. Hedge funds are less regulated than, say, mutual funds, and can invest in a wider range of projects. The deals are off balance sheet. They allow the studios to keep their costs down. And studios don’t have to borrow as much from banks so they can reduce the debt on their books. Structure and terms vary. Usually, the studio recoups P&A, takes a distribution fee, and then settles with gross participants. Then the funds get paid their share based on the percentage of a pic they financed. One carrot is that the investors’ risk is aligned with the studio’s. The newest deals include the $230 million Melrose Fund at Paramount, spearheaded by Merrill Lynch. It will put up 20% of the financing on about 25 pics over two to three years. Merrill also offered $500 million for Marvel to ramp up its own production. Walt Disney raised $500 million in a vehicle called Kingdom Films, aimed at funding 40% of 32 pics over four years. This summer, Legendary Pictures, led by venture capitalist Thomas Tull, set up a $500 million fund at Warner Bros. committing to co-produce and co-finance 25 films over five years. Dozens of other deals are making the rounds. The fledgling Weinstein Co. has secured $490 million in private equity and the same amount in debt financing from a variety of sources, including French broadcaster TF1 and moneyman Tarak Ben Ammar. Sony and Universal are rumored to be negotiating financing pacts with Deutsche Bank, a big Hollywood lender. These deals, while increasingly popular, are complex. “My observation is, that at any point in time, there’s $500 million in conversation, and $100 million in cash — a five-to-one or 10-to-one ratio between talk and deals,” says a former studio exec. The Melrose fund, which is covering a slate of films including “Mission: Impossible 3,” is a passive partner, meaning the studio retains full control over pic development. At Warners, Legendary has more input on films it’s co-financing. Legendary intends to take the lead on some projects in terms of buying scripts, with a production deal of its own. Legendary topper Thomas Tull (see story, page 6) and his small team, which set up shop this summer on the Warners lot, put up half the money for “Batman Begins” and “Superman Returns.” It also is co-financing M. Night Shyamalan’s “Lady in the Water” and animated family pic “Ant Bully.” Warners and Legendary haven’t yet said what other projects they will hook up on. Obviously, Legendary is expecting the $500 million fund to grow as returns come in, considering it is likely shelling out more than $200 million alone for the four already announced co-productions. In return for its investment, Legendary will split money from all revenue streams with WB once the studio recoups distribution fees and other costs. How long will the latest influx of Wall Street coin last? “We’re still in the early half of the cycle. You won’t see a pushback, if any, until people start getting burned. That’s at least an 18-month cycle, if you have a slate of 12-25 pictures,” says one fund manager and former studio exec. The theory — based on past returns — is that owning a small pieces of many films is a safer bet than investing in a single pic. Implicit in the deals, says one financier who works on them, is the idea that the investors could ultimately sell their interest. The current influx of cash is in part the result of a tepid stock market that’s discouraged investors, even as the revenue base of movies expands. “Content is growing — from T-shirts in Japan to DVDs in Europe to pay-per-view in the U.S.,” says Clark Callander of the Perseus Group, which served as a financial advisor in the Legendary deal. Domestic DVD growth may be flatlining, but it still accounts for billions of dollars that weren’t there half a decade ago. International box office is huge and may be growing as new territories open up. Studios are also touting new channels of distribution opening up via telcos and the Internet. Says a former studio chief, “The sell pitch is, ‘We’re at this transition point, going to interactive and libraries to unlock the vaults. If you get in now, you’ll participate in this huge upside from digital. And it will be huge.’ “ But risk-free it’s not. “It’s a little like going in and saying, ‘I can beat the house,’ ” says the former studio chief. Often the funds can’t choose the movies they invest in. So studios are more likely to steer the cash toward riskier projects. One investor who’s so far shunned the deals feels the distribution fees the studios are taking are too hefty. But deal proponents insist the fees are competitive. “There is a cost to distribution. It’s not pure profit. It’s a competitive business, so theoretically, the distribution fee is what you’d have to pay anyway,” says one. It works best “If you pick the right studio that’s on a three-year hot streak,” jokes one Wall Streeter. Yet it’s a finite group of players, so the question remains: Will there be enough to go around? Even producers say they’re feeling pressure to bring money to the table in this cost-cutting climate. “I’m in the process of raising money so our company can feed into the studios’ desire for creative financing,” says one vet producer. “The idea is that we would come in, and in addition to the projects we develop, bring half the financing, too. I think it’s inevitable that this is what’s happening.” (Pamela McClintock contributed to this report.)
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