Slate debate: Investors now get to pic & choose

Moneymen bargin for more dough, more control

Slate financing has a PR problem.

Lawsuits, the credit crunch and a number of films that didn’t return the kind of money investors expected have all made studio slate deals less palatable. And with the recent or near-end of several high-profile arrangements, the question now is whether new money will be in place by the time the old coin runs out — and whether the majors really need the capital at all.

Any new deal, however, will likely look a lot different than the majority of slate arrangements locked down between 2005 and 2008.

“The biggest challenge in getting a traditional slate financing deal done today is that significant losses were experienced (over the past decade), which has caused equity and subordinated capital providers to pull back,” says Christa Thomas, managing director and senior film adviser in SunTrust’s Private Wealth Management Sports & Entertainment Specialty Group. “The changing technology landscape, especially for home entertainment, has further eroded confidence around risk assessment and mitigation.”

And that’s caused financiers to demand more from Hollywood and to broker deals that add on many more layers and deal points.

In the past, many moneymen blindly financed slates of films they didn’t pick themselves. Their cash often covered 50% of the budgets on dozens of pics that ranged in degree of risk. Now, many co-financing arrangements involve fewer films and allow studio partners like David Ellison’s Skydance Prods. and Jeff Sagansky’s Hemisphere, for example, to have more leverage in choosing which films to partner on — especially among tentpoles.

“The old slate deals were just a blunderbuss,” says Stroock & Stroock & Lavan partner Schuyler Moore. “The real story is, it’s just not happening (anymore) … now what you’re doing is identifying your films going in.”

That’s because investors want more safeguards. They often want the chance to recoup a portion of their investment before the studio takes its fees, or they want to get their money back before the talent gets it backend.

But the question of which concessions the majors will or won’t make won’t be answered until more slate arrangements are assembled — something that seems much less likely than in years past.

Co-financing arrangements can take months to close, and the majors are always in discussions with investors to explore opportunities. While these deals aren’t essential to keep the lights on, most studios prefer to mitigate risk on all but their highest-profile franchises.

But when one door closes, another opens. As studios produce fewer of their own films, that provides room for distribution agreements with companies that have financed commercial projects — like the deals Universal inked with Cross Creek and MRC last year. Cross Creek’s Ron Howard-helmed “Rush” will mark the former pact’s first release, while MRC currently has Seth MacFarlane’s “Ted” in post-production.

While banks may be willing to lend, many observers wonder when equity will come back into the film-financing market. As a result, funds have turned their eyes overseas, particularly to China, India and elsewhere in Asia. Hemisphere’s coin, for example, came in large part from Japan’s Toho-Towa Co. and Kadokawa Shoten, and Korea’s Lotte Cinema.

Paramount, Warner Bros. and Fox all have co-financing deals in place, while Disney is the studio outlier. Credit Suisse First Boston arranged $500 million in funding for the Mouse House’s Kingdom deal in 2005 (the studio’s first co-financing arrangement in a decade), but that pact ended in 2009.

Sony was able to fund 18 films, including hits like “Salt,” “The Social Network” and “Grown Ups,” through its Beverly I slate-selection arrangement. While the package also included misfires like “Did You Hear About the Morgans?,” the pics overall grossed more than $2.6 billion worldwide.

Prior to 2008, estimates for a pic’s overall performance counted in large part on homevideo sales, which often matched or even doubled worldwide box office grosses. That set expectations high for slate performances, and those expectations have been difficult to meet in recent years because of the decline in DVD dollars.

Aramid Entertainment Fund, an investor in the Beverly I slate, sued Relativity and hedge fund Fortress in February over its stake in the deal. The suit didn’t name Sony or accuse the studio of any wrongdoing, but Aramid’s very public unhappiness with its deal adds to the negativity surrounding these types of arrangements.

But money is always knocking at the studio gates, some of it more real, some of it less. As Variety first reported in August, Sony secured financing for three of its tentpoles from Hemisphere (“The Smurfs,” “Men in Black III” and “The Adventures of Tintin,” the latter of which was also co-financed by Paramount), and the studio is always talking to investors about other potential opportunies.

Any discussions Universal is having with potential financiers comes in advance of the end of its own co-financing deal.

Beverly II, arranged by Ryan Kavanaugh’s Relativity Media and backed by Elliott Management in 2008, will fund films greenlit through the end of 2012, although the overall deal expires in 2014.

Under terms of the arrangement, Elliott funds about half the budgets of 75% of U’s films each year. And while U had some home runs in 2011, with hits like “Fast Five” and “Bridesmaids,” and this year with “Safe House,” the studio is still smarting from a string of modest to disappointing performers (including “Cowboys & Aliens,” in which Relativity participated) over the past few years.

Relativity can select films for Elliott, but it’s not clear whether U’s whole slate is open to them. Either way, Beverly II did not participate in “Fast Five,” which wound up grossing more than $600 million worldwide to become the “Fast and the Furious” franchise’s top grosser — one very big missed opportunity.

Across town, Paramount’s major co-financing arrangement comes from Ellison’s Skydance. The two partnered in 2009 for a four-year deal that would allow Skydance to co-finance four to six of the studio’s pics per year, including “Mission: Impossible — Ghost Protocol,” “Star Trek 2,” “World War Z” and “G.I. Joe: Retaliation” through Skydance’s $350 million fund (with a $200 million credit line arranged by JPMorgan Chase). Melrose II, a $300 million slate deal arranged by Dresdner Bank in 2006, wrapped up in 2008, although it still enables Melrose II investors to put money into sequels whose originals they also financed — provided that the studio releases those pics by 2016. Any new investors would not have access to films included in the Skydance or Melrose II deal.

In November, investors in Melrose II filed a suit against the studio over profits to more than 29 films (including “Mission: Impossible III,” “Charlotte’s Web,” “Dreamgirls,” “Blades of Glory,” “Jackass 2” and all three “Transformers” films).

Fox’s pact with Dune, renewed in 2010, marks one of the longest-standing co-financing relationships at any of the studios. Dune began funding Fox movies, including boffo pics like “Avatar” and “Live Free or Die Hard,” in 2005, and the pact’s longevity and multiple renewals suggest Dune’s contentment with its deal. Additionally, Fox has capital coming in from partners including New Regency and Ingenious, the former of which has been on the Fox lot since 1998.

Meanwhile, Warner Bros. is set for the near future. Its two major investors, Village Roadshow and Legendary Entertainment, both secured new credit lines within the past two years. Village Roadshow closed a $1 billion facility in 2010, while Legendary wrapped up a $600 million-plus facility last April.

Ultimately, whether they have co-financing coin or not, the studios are always in discussions with potential investors, and always considering new financing arrangements.

“All of the studios today are divisions of much larger conglomerates,” says Lindsay Conner, partner at Manatt, Phelps & Phillips. “Gone are the days when one mogul owned a big share of a studio, an
d that was the main business of the company. Today, they’re all part of larger businesses, and it’s a common and appropriate corporate practice to spread the risk of all expensive new initiatives.” What: Slate financiers demand more control over projects.

The takeaway: As studios mitigate risk, they must cede some control to the moneymen.

Return to Movies & Money >>