The big bucks for movies aren’t all coming from Japan. Warner Bros. has closed a deal with three major European entities that should yield almost $1 billion worth of new product.
The move dwarfs previous international co-financing deals and will, among other things:
* Provide France’s fast-rising pay-tv Canal Plus with a steady supply of mostly U.S.-made international films.
* Provide Warners, whose strong earnings year was blunted by a sour fourth quarter, with a fresh slate of films in return for putting up little more than prints and advertising dollars.
* Create an international reputation for an obscure but wealthy 46-year-old Israeli ex-soccer player named Arnon Milchan.
The bulk of the cash, some $600 million worth of production investment, comes from Milchan’s Paris-based financing, production and distribution company, Regency Intl. Pictures; top Gallic pay-tv network, Canal Plus; and Germany’s multimedia entertainment company, Scriba & Deyhle.
Although Warners was not talking figures last week, VARIETY estimates the studio is bringing between $250 million and $300 million to the table, making the total deal worth around $900 million.
The megadeal leaves in the dust David Puttnam’s 1988 $50 million revolving production fund agreement with Warners, Fujisankei Comm. of Japan, Britain’s satellite web BSB and Anglo merchant bank County Natwest Ventures. It also easily outdistances Jeremy Thomas’ $120 million revolving production fund, which involved investment from Shochiku-Fuji of Japan.
The fact that the key production decisions will be made by an Israeli-born Europhile who spends much of his time in France is regarded as something of a surprise by industry insiders. Conventional wisdom has been that it takes Hollywood managers to make Hollywood blockbusters. Milchan’s key aide, Steven Reuther, is a former production topper at Vestron and an ex-William Morris agent.
Not surprisingly, Milchan was in an upbeat mood over the whole affair late last week. “It’s the ultimate freedom for a producer,” he told VARIETY. “This means I can stop being a salesman and concentrate on production.”
Milchan, co-producer of “Pretty Woman,” “The War Of The Roses” and other hit pics, is the linchpin to the whole deal, maintaining control over all final production decisions. “We have total decision-making power in what movies are made,” he said. Milchan and his directors also will have final cut.
The majority of the 20-pic slate looks to be U.S.-made rather than European. According to Milchan, that is a reflection of the current state of the international market: “U.S. pictures are doing better worldwide than foreign films.”
Warners prez Terry Semel described the transatlantic link-up as one of “the most significant international partnerships in the history of the worldwide film industry.” Per Milchan, “The one thing I can say for sure is that Warners will make money on this deal.”
For Warners, the deal represents a welcome infusion both of funds and product at a time when the studio has been hurting. Though Warners experienced its best earnings year in 1990 thanks to successes like “Presumed Innocent” and “Goodfellas,” and to overseas winners like “Gremlins 2,” the company had a daunting fourth quarter. First “The Bonfire Of The Vanities” opened to withering reviews and weak business. And then “Home Alone,” which Warners had put into turnaround, turned into a world-class megahit.
Warners had given the kidflick the thumbs down when its budget soared from $10 million to $18 million; several other studios had also passed on the John Hughes project.
Warners has always been an active player in the co-financing field. The company has traditionally handled 22 to 25 pictures a year, many of them distribution deals. This year the number may rise to as many as 30.
Warners’ investment gives the studio most worldwide rights except foreign television. Foreign tv and pay-tv rights are still subject to negotiation but probably will be handled by distribberry Summit – a previously established partnership between Milchan, former Carolco topper Andy Vajna and German producer Bernd Eichinger. Given their past track records, Canal Plus probably will retain French pay-tv rights.
Warners also gets to see the early dollar returns. Per Milchan, “I would qualify their position as the closest to no-risk of us all. Most of the income that comes in first goes to cover Warners’ investment.”
While the Warners contribution essentially will cover marketing worldwide, Warners president Semel, who hatched the deal, emphasized that the studio also might contribute production financing at a later stage. This means a possible augmentation of the $600 million production fund.
Semel is known to place considerable stress on Warners maintaining control of worldwide marketing strategy, which he believes to be of equal importance to the production planning.
Although Milchan refused to comment, insiders suggest that Warners will pick up a distribution fee of between 15% to 25%. First income on the film sales will go to cover Warners p&a costs, and the studio’s fees. When those obligations have been met, the European producers walk off with the bulk of other revenues.
Under this scenario, even if the films only break even, Warners makes a healthy $180 million in fees. Copyrights on all the films will be retained by newly created Regency Enterprises through a partnership formed between Regency and Scriba & Deyhle. On the production financing front, Regency and Scriba & Deyhle are believed to have injected slightly over 50% of the coin, leaving Canal Plus to come up with just under 50%. According to Milchan, Regency’s investment has been covered by a line of credit arranged through German banks.
Although a full production slate is still in the future, two projects are known to be in the pipeline: “Rocky” director John Avildsen will helm “The Power Of One,” currently casting and budgeted at around $22 million; and the second pic, “That Night,” will be written and directed by Craig Bolotin and should come in at $12 million.
“The cash is already here,” said Milchan. “We aren’t like some people who have had to rely on their first movies making money in order to finance the rest of their slate. We don’t need blockbusters, but we do need quality pictures. It’s a different situation than if I was pre-selling some big names. In that case, if you can get enough advances it doesn’t matter if the film works. For us, the movie will make a difference.”
The four-way deal originally started life as a less ambitious partnership between Milchan and Warners. “I’ve known the guys at Warner for years. Terry Semel and Bob Daley are the ones who sat with me until four in the morning after the first preview of ‘Once Upon A Time In America’ came out of Boston.”
The Boston preview audience was taken by surprise when told how long the film was. Many people simply got up and left the theater and Milchan recalls being devastated by the reaction. “Terry and Bob stopped me from jumping from the 14th floor; that was very gracious of them.”
In June 1990, Milchan came to a first-look agreement with Warners. “We both knew that this was a license to get into bed together more seriously. They were offering me a lot of advances and goodies, while we basically talked to them first about projects. We could also get out of bed quickly, as the arrangement was only due to last two years.”
Within two months, however, Milchan came to the conclusion that a little fine-tuning was needed.
“It became clear to Warner and to me that I would not enjoy the relationship enough, and they would not be using me enough, if I could not find the same pace of decisionmaking as I had before in my life.” In short, Warners’ committee-style management was proving a little short on speed.
Last August, Milchan and Semel met in Paris and decided that there was a future for a structure resembling the Tri-Star/Columbia deal. “The difference was that, instead of having an all-American setup, we would have European-funded production distributed by an American major.”
Warners’ position was straightforward. Semel told Milchan that if he wanted a free hand he had to come up with the lion’s share of investment. “My reaction was that this was great, but it was an awful lot of money to put down,” recalls the producer. Semel suggested finding possible partners and one of the first names to crop up was that of French pay-tv giant Canal Plus.
Milchan already was talking to Canal Plus about separate production projects. As an equity partner, the web is a logical choice. Canal Plus’ financial pockets are deep, with 1991 profits expected to be in the range of $200 million. In addition, the web was preparing to launch its own film studio – Studio Canal Plus – and CEO Rene Bonnell needed pics to kickstart the operation. With financial commitments from Warners and Milchan on the table, Bonnell decided to come on board.
The Frenchman’s decision to invest heavily in U.S.-made movies could indirectly save him a lot of money. To meet the heavy film programming requirements of Canal Plus, Bonnell has to buy around 200 Yank pics a year. His big fear has been that American sellers will gang up on him and push up prices. Now that he is showing that the web is capable of making films inside the United States and is not simply a buyer, industry observers say Yank sellers will have to hold down price demands.
Just as Milchan’s connections with Warners and Canal Plus go back years, he also is no stranger to his German partners. “Bodo Scriba and Rolf Deyhle, I’ve known them for a long time and they’d already worked with Warner most recently on the co-production of ‘The Neverending Story II.’ They are also very active in eastern Europe.”
Scriba was CEO at the powerful Leo Kirch Group for 11 years. He joined forces with Stuttgart business tycoon Rolf Deyhle and, along with the giant Axel Springer newspaper publishers, formed Capitol Film and TV Intl. Gmbh & Co. KG in November, 1988. Springer holds a 60% stake while the Scriba & Deyhle OHG company has 40%.
Capitol acquires feature films for tv in the German-speaking territories and currently has a library of 1,300 films and over 600 hours of programming.
Since teaming up, Scriba and Deyhle have gotten into film and tv distribution and production worldwide, as well as theatrical exhibition in Germany. The pair already has had dealings with Warners, co-financing the “The Neverending Story II” with the Yank studio.
Don Groves in London and Jack Kindred in Munich contributed to this story.