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Author Topic: Financial Crisis Puts Squeeze on Hollywood  (Read 361 times)
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« on: September 21, 2008, 04:08:22 PM »

Financial Crisis Puts Squeeze on Hollywood

Having trouble getting credit in these trying economic times? Don't feel bad, so is Steven Spielberg. His DreamWorks SKG is waiting for a $500-million deal with Indian entertainment conglomerate Reliance to close. It would allow the company behind movies like Tropic Thunder and Transformers to abandon an unhappy partnership with Viacom's Paramount Pictures and produce six films a year at another studio. The hitch keeping DreamWorks and Reliance from sealing the deal is the challenge of raising an additional several hundred million dollars in debt financing at a time when Wall Street is feeling pretty stingy about extending credit.

Monday's Chapter 11 filing by Lehman Brothers and the bailout of Merrill Lynch by Bank of America have only added to a yearlong credit crunch that is changing the way film financing deals are structured in Hollywood. Not unlike homebuyers facing tougher standards to get a mortgage, the people who greenlight movies are facing more stringent demands from their financiers. "All of the studios, if they want to get a deal done in this environment, will need to better align their interests with investors," says P. John Burke, a film finance lawyer at the firm Akin, Gump, Strauss, Hauer and Feld.

Four years ago, movie companies and Wall Street banks embarked on a promising romance. Before then, the smart money on Wall Street had stayed away from Hollywood. And not without good reason starting with William Randolph Hearst in the silent era, plenty of wealthy investors with stars in their eyes had lost big money in the high-risk business of financing single films. But in 2004 banks like Merrill Lynch, JPMorgan and Goldman Sachs found themselves with a glut of capital and no place to put it. Studios, meanwhile, were looking for a way to please their fiscally conservative corporate parents and share some risk. Some financial whizzes matched supply with demand and came up with a new way to bankroll films: institutional investors could take a portfolio approach to film financing and buy a stake in several of a studio's films, like a mutual fund of movies. The goal was to share in the typically 13%-18% annual rate of return that studios enjoy, with hits outweighing duds.

"We were all coming into a theoretical concept," says Ryan Kavanaugh, whose Relativity Media has invested in films with budgets totaling more than $8 billion, in partnerships with Sony, Universal, Warner Bros. and others. "Let's plug this into a model and let's do it. There were a dozen deals, some that worked, some that didn't."

By 2006 the film finance market had worked itself into a froth, and banks far and wide were looking to get in on it. "There was an influx of so much capital, it caused deals to get priced in ways that didn't make sense," says Kavanaugh.

Merrill Lynch was a big player in April 2007 it wrangled more than $1 billion for Summit Entertainment, a new studio that is releasing the hotly anticipated movie Twilight in November. It also backed a $500-million production facility for MGM's United Artists division, which is releasing the less promising-looking Tom Cruise vehicle, Valkyrie, in December. "Do those deals happen in today's market?" asks a rival studio executive. "I'm not sure about that."

That's because in the last 12 months, as the economy began to buckle under the housing crisis, some banks dropped out of Hollywood, including Merrill Lynch, Lehman Brothers, Deutsche Bank and Dresdner Kleinwort. Those sticking around are asking for more for their money. Now investors are demanding that studios lower their distribution fees, market their films with more discipline and, most importantly, stop cherry-picking the best films from their slates. In the earliest deals, studios withheld their biggest potential hits from the funds Sony kept all earnings from its Spider-Man sequels, for example, while investors picked up the tabs for under-performers like The Other Boleyn Girl and RV. Under the new deals, investors are demanding a piece of more of the sure things and right of refusal on less promising prospects.

Companies looking to close finance deals in the next few months include the Weinstein Co., Paramount, DreamWorks and MGM. At least publicly, no one is admitting they're worried about securing financing in the new environment. MGM's fund "will be raised with a group of top banks, and it is expected to come together in the near future," says spokesman Jeff Pryor. "We are confident this will close since the agreement features an array of quality productions."

Kavanaugh, one of the few who has been able to close studio finance deals in the past few months, says he welcomes the new rules. "It's a natural equilibrium that had to happen," Kavanaugh says. "There's not a fire sale going on. Smart deals will continue to get made, with investors having a significantly better seat at the table."

The market pressures may even have an upside for the studios, in terms of pacing and quality control. Too much money in the marketplace has resulted in too many movies competing for eyeballs, some studio execs say. "A lot of us are looking at our release schedules and making a conscious decision to slow it down," says one executive whose studio is currently seeking financing. As evidence, he points to how many companies shuffled their lineups when Warner Bros. moved the next Harry Potter movie from November to summer 2009. "When you take a gigantic vacuum out of the marketplace, everyone gets to breathe a little."
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