Private equity changing face of film industry

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CANNES -- Private equity has transformed the U.S. film industry. Players like Relativity Media, which invested in slates at Sony and Universal; Dune Entertainment, which is backing films at 20th Century Fox; and Merrill Lynch, which is close to funding the new Tom Cruise-headed United Artists, are underwriting the major studios.

But with the U.S. market stuffed with hedge fund cash, equity groups are looking abroad for investment opportunities in the media space. Where and how the big players decide to invest could radically reshape the industry in Europe and Asia.

While hedge funds are famously tight-lipped about what investments they are eying, the difference between the international and U.S. markets suggest that private equity strategies will take a different form abroad.

"Hedge funds are interested in volume and there is no one company in Europe or Asia that can deliver a slate of $30 million-$40 million pictures," said Brian Gilmore, principal at investment banker house Capitoline Global Finance. "So what you are seeing is funds looking at assets -- companies they can buy and merge with others to get the volume they need."

The pre-Cannes fusion of European sales groups Celluloid Dreams and HanWay to create Dreamachine is a deal that is being watched closely by private equity groups as a possible model for future cross-border hookups.

"I really like the Dreamachine deal, it looks very smart," the director of film finance at one of Europe's leading national banks told The Hollywood Reporter. "Alone, neither of these companies was big enough to be able to go to the next level, to access financing to do big pictures. Together, they should have the volume to access debt financing, enough to get backing for slates of pictures in the $10 million-$40 million range."

Because of the Byzantine system of film financing in Europe -- with complicated national tax structures and state subsidies, many observers see outside equity buying into distribution-based companies rather than production houses.

"We've been approached by equity firms that like the idea of a company that has all the separate parts of the distribution chain in house," said Andreas Klein, CEO of German indie Splendid, which bundles theatrical, DVD, TV sales and synchronization duties under one corporate roof.

Similarly, in Asia, investment banks and hedge funds are targeting whole companies.

With backing by ABN-AMRO, Fireworks International recently paid $50 million for a 36% stake in Taewon Entertainment of South Korea. Fireworks has committed an additional $50 million in various forms to, among other things, help Taewon buy into CGI companies in the region.

"Taewon is our Korean partner and our film partner," said David Roberts, managing director and head of Asian Equities for ABN-AMRO, adding that the equity investment is aimed at helping Taewon to become a leader in making Hollywood films with an "Asian feel."

That isn't to say no one is investing directly in foreign film slates.

The Weinsteins have set up a $285 million fund, with the help of Goldman Sachs, to invest in movies with Asian themes and elements.

The fund will be used to finance the production, acquisition and marketing of about 31 Asian films to be distributed by the Weinstein Co. over six years.

And at Cannes, principals in the fledgling Hong Kong-based A3 Intl. Film Fund declared their intentions to begin to raise $100 million during the next three months for the purpose of making 30 Asian films with varying budget levels during the next five years.

European production companies with a strong track record -- like Luc Besson's Europa Corp. ("Arthur and the Invisibles," "Taxi," "The Transporter") or the U.K.'s Big Talk Productions ("Hot Fuzz," "Shaun of the Dead") could also be targets for big-pocketed funds.

"This is all about making quality product that will sell internationally," Capitoline exec Gilmore says. "It's about giving the Luc Bessons or Pedro Almodovars of the world -- who can deliver the quality -- the capital to take it to the next level. Whether that's by buying assets or debt-financing foreign slates is going to vary from territory to territory and company to company."
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