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How Ugly Will It Get for STX Entertainment?

When it launched in 2014, STX Entertainment was supposed to be a smarter and nimbler entertainment company, one that could open compelling movies and launch quality television shows while keeping a lid on costs.

Five years later, the upstart studio has little to show for its efforts, and following the box office failure of “UglyDolls,” an animated movie that the company hoped would launch a franchise, its financial and creative future looks perilous. As if to rub salt in the wounds, STX’s release of “Poms,” a low-budget movie about a cheerleader troupe of senior citizens, has also met with lackluster box office results.

Under the leadership of CEO Robert Simonds and motion picture chair Adam Fogelson, STX has repeated the same refrain for years — that the company mitigates its financial risk by spending less on marketing and by selling off foreign rights to the films it makes. But the “UglyDolls” returns are not pretty. The film had a production budget of $45 million, two individuals familiar with the company tell Variety, and a marketing spend in the $45 million to $50 million range, one of the insiders adds. After earning only $14 million at the domestic box office to date, the film represents a significant material loss, one that could result in tens of millions of dollars. The same goes for “Poms,” Diane Keaton’s aging-cheerleader adventure, which was acquired out of AFM last year for roughly $8 million and earned $5 million.

On top of performance woes, STX’s long-touted Chinese ties have never looked murkier, due to the expiration of an overall co-financing deal with Huayi Brothers Media and the cancellation of a public offering in Hong Kong after a trade standoff between the U.S. and the Middle Kingdom intensified.

These misfortunes collide at a time when STX has lost a powerful ally, Bill McGlashan of TPG. The investment czar led several rounds of fundraising for the studio, including a reported $700 million debt and equity recapitalization in March. However, McGlashan was terminated from both his company and the board of STX in April after he was charged in the Varsity Blues college admissions scandal. TPG’s C-suite is said to be focused on profitability in the wake of McGlashan’s exit.

“Bill McGlashan’s departure has no impact on the relationship between TPG and STX,” says a spokesperson from TPG, adding that the company “continues to support the long term vision” at STX. TPG execs David Bonderman and Mike Stone still sit on the STX board.

“Look, it’s a difficult space and they’ve had some successes, but the ‘UglyDolls’ disaster shows a larger systemic problem. That would be biting off more than you can chew,” says an executive at a fellow studio.

“UglyDolls” has been pegged as make-or-break for the company for years, considering that animation as a genre is nearly impossible for independent studios to execute successfully. Initially greenlit for creator Robert Rodriguez, the property changed hands to director Kelly Asbury. A cast including Kelly Clarkson, Janelle Monáe, rapper Pitbull and Nick Jonas was assembled, with additional spending on original music from its stars.

“Where the hell is the hit song?” an exasperated rival executive asks, comparing the “UglyDolls” strategy to that of the DreamWorks Animation hit “Trolls.” Justin Timberlake’s title track from that film, “Can’t Stop the Feeling,” became the top-selling single of 2016. No such luck in Uglyville.

While STX does acquire finished films to populate its release calendar and satisfy output deals for the likes of streaming video-on-demand, a reverberating loss like “UglyDolls” at any other studio would typically result in staffing overhauls. But STX can’t easily orchestrate that kind of shake-up.

Fogelson operates as the lone senior creative, following the resignation in 2018 of STX president Sophie Watts, who was never replaced. STX chief content officer Oren Aviv was reassigned in 2017 to oversee the “UglyDolls” universe, which also includes a streaming series at Hulu and a dizzying amount of expanded content like toys, print and digital publishing and music, the future of which has been called into question with the film’s failure. Noah Fogelson, Adam’s brother, serves as the company’s general counsel and executive vice president of global strategy. In senior film leadership, domestic distribution head Kevin Grayson works alongside his wife, marketing co-head Alyssa Grayson. It’s unclear who STX might sacrifice to show its investors it is serious about turning a profit, which one insider says is a top priority at TPG after McGlashan’s exit. The company did part ways with chief operating officer Tom McGrath last week, while Aviv remains in place for now. An STX insider says Chinese conglomerate Alibaba, a partner on “UglyDolls,” is committed to an aggressive merchandise and licensing expansion of the toy brand.

“It wouldn’t surprise me to see some of the major studios emulate some of the ways we have de-risked production and marketing spending,” Noah Fogelson tells Variety. “We are delivering entertainment content in the most cost-effective way. We have a new concept in a mature industry, and we’re trying to disrupt ways that content is produced and delivered.”

Another STX insider said 12 of the last 14 film releases at the studio turned a profit, most notably “The Upside” — a Kevin Hart drama they rescued from the wreckage of The Weinstein Co., which fetched $123 million worldwide in January on a reported $37.5 million budget. The only exceptions in that run are Melissa McCarthy’s “The Happytime Murders” and Mark Wahlberg’s CIA thriller “Mile 22.”

The co-financing pact with Huayi Brothers, spanning 18 films, expired at the end of 2018. The last title in that agreement is Chadwick Boseman movie “21 Bridges,” out in July. A Huayi Brothers spokesperson tells Variety there are no current discussions about a new overall deal, but it’s possible the company will collaborate with STX on future individual projects.

A planned public offering on the Hong Kong Stock Exchange fell through last October — largely the result of trade tensions between the U.S. and China. Tech, media and telecom stocks dropped as much as a staggering 50% in the political fallout, Simonds told his staff in a memo explaining the failed listing. A new listing application wasn’t submitted, and STX has dismissed a financial PR firm it retained in Hong Kong. To date the studio hasn’t opened an office in China. That’s caused more problems for STX. Many staffers are quietly looking for jobs because part of their compensation packages involved stock options, insiders say. With the studio’s public offering delayed indefinitely, the payday they imagined for themselves is looking less likely.

It’s not all bad news. The studio bagged Hart to develop two more feature comedies. Similarly, it won Jennifer Lopez’s “Hustlers” from Annapurna, set to release this fall, and will produce an adaptation of the graphic novel “Marry Me” with the actress, formerly set up at Universal. The 2020 slate also includes low-budget horror (“Brahms: The Boy II”), a live-action family comedy (“My Spy,” with Dave Bautista) and a filthy-mouthed crime caper from Guy Ritchie (“The Gentlemen”).

Patrick Frater contributed to this report.

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