STX Tries to Put Flops Behind It as It Searches for Star Executive, Fresh Capital

Courtesy of STXfilms

After a series of film flops and an aborted initial public offering, STX Entertainment is battling mounting skepticism that it can survive in an increasingly unforgiving movie business.

As it hustles to find $500 million in fresh capital, the company, which operates in the red according to financial disclosures, is simultaneously hoping to attract a “superstar” executive to help stabilize its struggling film division. The company has started to interview candidates for the job, and is open to hiring someone to serve as co-chairman of STX Films alongside Adam Fogelson, who retains the support of the company’s leadership. The studio is looking to signal to the industry that it is righting the ship after the anemic financial performance of “UglyDolls,” “Poms,” and “Best of Enemies” and a lackluster track record of fielding hits. For this reason, STX may have difficulty in attracting top executive talent.

Even as it looks to improve the quality and consistency of the movies it produces, STX is facing fierce box office headwinds. Mid-budget dramas, thrillers, and comedies of the kind that the studio primarily makes are being overshadowed at the multiplexes by superhero extravaganzas and franchise fare. In a business dominated by mega-conglomerates such as Walt Disney and WarnerMedia, the industry hasn’t been welcoming to new companies hoping to shake up the status quo. In recent years, film companies such as Relativity Media, Global Road, and Broad Green have gone bankrupt or closed up shop, unable to make the numbers work in a business in which producing blockbusters requires more luck than science.

“The history of Hollywood is littered with the bodies of these companies,” says Hal Vogel, a veteran media analyst. “The initial press release is usually the high point of their existence.”

In seeking additional sources of capital, company founder Robert Simonds has been jetting around the world talking to potential investors, including sovereign wealth funds of the United Arab Emirates and Saudi Arabia. He has also met with investment firms in China and New York. Those meetings have led to a growing perception that STX is experiencing a cash crunch despite recently announcing it had raised $100 million in equity financing. The studio disputes that it is in financial trouble, arguing instead that the new investment will be used to help the studio buy smaller film or television companies with libraries.

“We’re looking to raise capital to accelerate growth,” says Andy Warren, CFO of STX Entertainment. “That’s very different from raising capital to fund current operations.”

Any new investment comes with challenges. Simonds is working to ensure that the new capital isn’t delivered in return for preferred stock, which could diminish the value of other equity stakeholders’ shares in the company. The STX chief is hoping to have a deal that relies more heavily on common shares, even as Simonds recognizes that more capital investment or acquisitions could ultimately increase the company’s valuation. It’s a delicate balance to maintain, one that is limiting the pool of potential investors. The studio could also suffer public relations issues if it accepts money from Saudi Arabia. The kingdom was once seen as a lucrative new source of investment, but the 2018 murder and dismemberment of journalist Jamal Khashoggi on the orders of Saudi Crown Prince Mohammad bin Salman has made Hollywood companies wary of getting into business with funds with ties to the regime. [Editor’s note: The Saudi Research and Marketing Group is a minority investor in Variety‘s parent company, Penske Media].

STX had initially planned to go public on the Hong Kong Stock Exchange, but those ambitions collapsed in October as trade tensions between the U.S. and China intensified. Since that point, STX has lost several key staffers, including film executive Oren Aviv, COO Tom McGrath, and spokesperson and chief brand officer Patti Röckenwagner. Now, the studio is on the hunt for more creative firepower to help build the company’s slate, several individuals familiar with the company told Variety, and wants an executive with production experience. The company may hire more than one person. They are also open to bringing in someone at a lower level, reviewing potential executive vice president candidates as they look to improve relationships with the creative community.

It’s unclear which executives are under consideration for the top film role. Earlier this year, STX engaged in talks with Jeff Robinov, the former head of Warner Bros. film business and the founder of Studio 8, about joining forces. The hope at the time was that Robinov could bring potential projects for the company to produce. Under one scenario, STX would have purchased Studio 8 and moved Robinov into a top executive role. The discussions commenced in 2018 as Studio 8’s distribution deal with Sony Pictures was wrapping up with very little to show for the alliance. Studio 8 produced the box office bombs “Billy Lynn’s Long Halftime Walk,” “Alpha,” and “White Boy Rick” during its time at Sony.

When STX launched in 2014, it planned to up-end the movie landscape by producing the kind of star-driven, mid-budget films that major studios had abandoned in favor of sequels and comic book movies. That strategy hasn’t always worked, with only “Bad Moms” and “The Upside” producing impressive financial results. The company has long maintained that it can succeed by making ten to 15 marginally profitable movies a year, citing such films as Amy Schumer comedy “I Feel Pretty” and Gerard Butler thriller “Den of Thieves” as examples of its business plan paying off. It contends that it is able to make the numbers work without relying on blockbusters as long as it reins in marketing spending and keeps its overhead low. That also means that if a movie fails, as the animated movie “Ugly Dolls” did, the studio doesn’t suffer the same type of financial losses as a competitor would have to endure.

STX initially lined up an impressive list of investors such as TPG Growth and Hony Capital. Yet the moves the company has been making in recent months have been ratcheting up the sense in the industry that it is in financial trouble. Last week, STX pushed the Dave Bautista comedy “My Spy” to next year. Insiders said it wanted to put distance between the film and the recent Bautista flop, “Stuber.” The company is also weighing whether or not it will stick with plans to release the Chadwick Boseman thriller “21 Bridges” on September 27 or if it will try to find a different date. Moving films around on a release calendar can signal that a studio lacks the financial resources to promote and distribute them. In an interview with Variety, Warren said rumors that the studio was short of cash were “not true.”

“STX continues its strong growth trajectory in 2019 with forecasted revenues of approximately $600 million, a roughly 200%  increase over our reported 2017 result, driven by our growing library annuity streams, strong global performance and significant scripted and unscripted television revenue growth,” he said. “We are forecasting 2020 global revenues of $800 million to $1 billion.”

STX may have grown its revenues, but in a prospectus filed with the Hong Kong stock exchange it revealed that it lost money for every year of its existence. In 2017, for instance, losses stood at $11.8 million and increased to $28.1 million in the next financial quarter. Although it operates at a loss, STX maintains it is well capitalized. The company has a $300 million credit facility with JP Morgan Chase, according to two individuals with knowledge of the company’s finances.

STX is a privately held company, so it is not tracked by analysts. However, industry observers such as Vogel believe that the company’s ambitions, which at one point extended to consumer products and virtual reality, were too vast. He likens their issues to those of DreamWorks, a media company launched by Steven Spielberg, David Geffen, and Jeffrey Katzenberg that was never able to successfully compete with other entertainment conglomerates.

“You couldn’t have assembled a more star-studded management team than that they had at DreamWorks,” said Vogel. “They had a nice logo and pockets full of money and they found it was difficult to stand out. They had everything going for them on paper, and I think it may be the same thing with STX.”

In the wake of the decision to move “My Spy,” creative talent with projects at STX are growing nervous about the company’s ability to spend on robust marketing campaigns. Filmmakers behind “Hustlers,” an upcoming film about strippers who turn the tables on their Wall Street clients, were specifically said to be anxious about the rollout of the September release.

Others close to the company disputed that the studio is shortchanging “Hustlers,” which boasts a starry cast that includes Jennifer Lopez, rapper Cardi B, singer Lizzo, and Constance Wu. Another insider close to Lopez and producer Elaine Goldsmith Thomas said they are pleased with Fogelson’s commitment to the film. A trailer for “Hustlers” dropped on Tuesday night, attracting positive buzz on social media.

There are signs, however, that a divide may be opening up between the pop star and the studio. On Monday, another Lopez project abruptly left the studio for a new home. The music-focused romantic comedy “Marry Me” moved from STX to Universal Pictures. The film stars Lopez and Owen Wilson, and is budgeted between $20 million and $25 million, sources close to the deal said. While Lopez carved out time in her schedule to shoot this fall, STX told the pop star last week that she’d have to wait until May of 2020 to begin work on the project, one of the insiders close to the movie said. Lopez did not want to wait.

With the theatrical movie business facing more competition from cable and Netflix and ticket sales in the U.S. flagging, STX is looking to change some parts of its business model. It is trying to continue to grow its television and digital business, having signed deals to produce shows for the likes of BET, Hulu, and Quibi. On the film front, while STX plans to produce between 12 and 15 movies in 2020, it’s looking to mix up its distribution strategy. Three to five of these films may forgo a theatrical release or will be co-productions with a streaming service or another type of pay programming platform.

STX insists that it is well positioned to survive and even thrive in a rapidly changing entertainment landscape, but in a business that runs on schadenfreude, a favorite lunch meeting guessing game is speculating on the studio’s health. In that atmosphere, STX would love to silence its critics.

The best way to do that is to make more hit films.