Intermedia/Spyglass: A split decision

Company on course after acquisition is killed

Even at the loftier levels, independent production is a never-ending search for coin. Every year brings a new funding fad — video, insurance, rich civilians — that offers a respite until the seemingly inevitable fallout.

Media stocks on the German Neuer Markt suffered a similar rise and fall, with one exception: Intermedia. The sales company that Nigel Sinclair and Guy East launched in 1996 with their second mortgages made its market debut in May 2000 with a valuation of more than $1 billion.

As other media companies such as Kinowelt, Advanced and Intertainment dropped like fliegen, Intermedia held its value and then some with announcements like producing “Terminator 3” and signing production deals with Reese Witherspoon and Kevin Spacey. Most recently, Intermedia nabbed the revenues from foreign rights on “Gangs of New York” and “Ali” with the acquisition of Graham King’s Initial Entertainment Group from Splendid Medien.

When Intermedia announced its intent to acquire Gary Barber and Roger Birnbaum’s Spyglass Entertainment, the indie film industry felt the merger would create an indie studio to rival the majors.

On March 4, everyone got a wakeup call when partners of both companies announced they’d jointly decided to cancel the merger. East and Sinclair will remain as co-chairmen of Intermedia. And although the company now is worth 63% less than it was valued at March 3, it still commands a large presence in the film world, with a war chest of money, a slate of pics and deals with top talent.

Some market watchers in Germany believe the merger fell through because Spyglass execs didn’t like Intermedia’s numbers, while U.S. commentators shift the blame to the classic Hollywood downfalls — egos and money.

In this case, the corporate cultures of Spyglass and Intermedia were too different to meld, while some say Sinclair wanted a richer exit package than Barber wanted to approve.

But Intermedia remains a player in the film biz.

Although the announcement included the painful detail that Intermedia will suffer a loss with a change in its accounting rules, that profit warning stemmed primarily from the upcoming $90 million Harrison Ford pic “K-19: The Widowmaker,” directed by Kathryn Bigelow.

The movie will prove something of a watershed for Intermedia. If it proves successful in its U.S. release this summer, that negative impact should be more than reversed.

Intermedia’s U.S. distribution deal with Paramount gives the sales company a significant share of the upside in return for a modest share of the risk. If the movie reaches a $60 million gross — below par for a Ford action drama — Intermedia will be about $8 million out of pocket. At $100 million, the company will be comfortably in profit. At $150 million, the very top end of expectations, the film would add $40 million to Intermedia’s bottom line.

Increasingly, the company is shifting toward deals like this one in selected territories, rather than relying solely on worldwide pre-sales to cover production costs.

However, WestLB Panmure media analyst Annalie Hoppe says Intermedia’s announcement of new accounting principles has hurt the company’s credibility with the marketplace.

“Intermedia took a huge hit and seriously upset their investors with this announcement,” Hoppe says. “They killed any trust in their shares.”

In the meantime, Intermedia is not the only one to feel the pain. On March 6, Splendid reported it would write off 16.3 million euros ($14.2 million) from the Intermedia shares it received last year in the sale of Initial Entertainment Group. Intermedia’s stock closed March 7 at 8.42 euros.

Hoppe says Intermedia’s problems have less to do with the Neuer Markt as a whole and more with the domestic and international film business.

The company sold itself as an intermediate producer/distributor completely independent of the local theatrical distrib biz, she says. However, an overabundance of films on the market means German distribs face an uphill battle unloading second-run rights onto cash-strapped TV broadcasters — not to mention Intermedia’s own failure to secure German distribution for high-profile titles such as “K-Pax” and “K-19.”

Despite its current share price, Intermedia still has much to offer.

The company is cash-rich — richer than it would have been if the Spyglass deal had gone through — and has deals in place with an array of top producers including Sydney Pollack, Barry Levinson and Mark Johnson.

Then there’s the product: Among upcoming Intermedia titles are MGM’s “Dark Blue,” Columbia Pictures’ “National Security” and “Basic” and Universal’s “The Life of David Gale.”

Of course, no film company has been able to figure out how to engineer film slates that consistently conform to the demands of quarterly reports.

Intemedia is no exception: While “The Wedding Planner” and “K-Pax” each debuted at No. 1 on their respective weekends last year, the company’s track record includes plenty of less-impressive titles, such as “Company Man,” “Enigma,” “Hilary and Jackie,” “Love’s Labour’s Lost” and “Up at the Villa.”

Given the loss of face that Intermedia has suffered in the last week, big box office numbers may be the only thing that can restore investors’ faith.

While Intermedia’s standing has suffered among some investment banks, Christoph Schmidt, a media attorney with PriceWaterhouseCoopers Veltins in Munich, expresses confidence in the company’s product. However, he predicts its stock price will remain weighed down by its profit warning and upcoming annual figures, which will be published March 14. He also adds that what happened to Intermedia is a reminder of the high risk endemic to the film industry.

Says Schmidt, “It’s certainly different than investing in real estate.”

(Adam Dawtrey in London contributed to this report. )