Studio, investment fund negotiating fifth financing pact since 2005
While some Wall Street investment funds can’t get away from Hollywood fast enough, investment firm Dune Capital Management is in the midst of extending its long financing relationship with 20th Century Fox in what’s the fifth transaction they’ve done together since first partnering in 2005.The Dune-Fox partnership is seen in the biz as the most successful example of a studio and Wall Streeters teaming to provide off-balance sheet financing for pics. The length of the relationship and the fact that the two sides are looking to extend well into the future are the strongest signs that both sides are happy with the deal. Unlike many slate financing deals, Dune Entertainment, the firm’s film finance fund, invests in almost all of 20th Century Fox’s slate rather than cherry-picking selected titles. The sides are currently about halfway through their most recent deal, which was set in 2010. Reps for Fox and Dune declined comment. To complete its latest extension with Fox, Dune Entertainment will have to make a deal in a much tougher economic environment than when the pair first pacted in 2005. Dune is considering a refinance and increase of its $400 million senior debt facility, which could bring more money to the table to fund Fox pics. To do that, the fund will need to leverage its receivables from Fox — which multiple sources say far outweigh the amount of debt owed. Dune continues to receive monies from films it has helped finance, including “Avatar,” in perpetuity. Sources close to the situation say there’s no doubt a deal will come together given the multiple renewals since 2005. But the atmosphere for studio slate deals is markedly different than when Dune got into the film finance biz. In 2005 Dune, led by respected financial guru Chip Seelig, raised $400 million in equity from roughly a dozen investors to co-finance Fox’s films. Wall Street was keen to invest in the movie business, and almost all of the major studios nabbed hundreds of millions of dollars in slate financing deals between 2005 and 2008. About a year later, Societe Generale and one other European bank brought a group of other lenders into ICM’s screening room in Century City to pitch them on refinancing Dune’s senior loan. By the end of the presentation, the level of interest in loaning to Dune for the Fox financing slate was higher than predicted. About 15 banks agreed in principle to do the deal that afternoon. Since then, most European banks have largely exited the film business, and fewer than 15 domestic banks currently lend to the entertainment industry. Seelig has left Dune, which is currently headed by Steve Mnuchin, a former Goldman Sachs partner whose hedge fund and Wall Street experience has earned him a reputation as a sharp dealmaker. After their 2007 reup, Fox and Dune continued to make movies, including “Live Free or Die Hard,” “Rise of the Silver Surfer” and “Night at the Museum: Battle of the Smithsonian.” Then came “Avatar,” which flooded the coffers of both sides. James Cameron’s 2009 juggernaut earned more than $2.8 billion worldwide and will spawn at least two sequels. Dune’s participation in those sequels is clearly a motivation to continue the relationship with Fox. But even as “Avatar” set B.O. records, the global economic meltdown made financing deals much tougher in Hollywood, as in every other business sector. Wall Street began a departure from the movie business, and a number of banks shuttered their entertainment lending practices. As a result, many studios are now scrounging for equity. Investors today are demanding concessions that complicate, and often derail, potential financing partnerships. Dune’s core investors were not immune to the financial turmoil. According to one insider, a number of charter Dune investors took hits in connection with Bernie Madoff, whose Ponzi scheme scammed billions of dollars from individuals and institutions before his arrest in 2008. But Dune and Fox’s approach was to have Dune invest in a broad swath of Fox’s slate, a strategy many credit with the pair’s long-standing relationship. The hefty investment allows Dune to participate in future “Avatar” sequels and offsets the inevitable B.O. misses. That’s similar to Melrose II, Paramount’s co-financing vehicle, whose investors undertook a complicated series of transactions last year to ensure their continued participation in the “Transformers” franchise. But no other studio has seemed to make that formula work as well as Fox: Paramount is in the midst of yet another lawsuit by its investors — from Melrose II — while Aramid Entertainment Fund, an investor in Sony’s Beverly I slate financing arrangement, is in the midst of litigation against Relativity Media, which arranged the original deal, and hedge fund Fortress in February over its stake in Sony’s slate. That suit didn’t name Sony or accuse the studio of any wrongdoing, but Aramid’s public unhappiness with its arrangement has added to the negativity surrounding these types of arrangements. Warner Bros. has a long-standing relationship with production shingles Legendary and Alcon, which both take on active creative roles in the films in which they participate. Disney is the studio outlier, not typically favoring off-balance sheet financing. Mouse House allowed its 2005 co-financing vehicle to expire in 2009. Observers say much of the credit for the harmonious relations between Fox and Dune comes down to Fox’s famously budget- and margin-conscious approach to managing the film studio. That focus on profitability — and a runaway hit in “Avatar” — has been a boon to investors.