Wall Street's Rocky Love Affair With the Movies
Call it Hollywood's Golden Age: During a five-year period ending in August 2009, about $17.4 billion in film-slate financing poured into the movie business, with major banks like Goldman Sachs eager to get in on the action. Then the recession hit, many deals went south, and the money dried up. But finance insiders say the drought is about to end.
"There's more activity, more phone calls, more term sheets and people coming in and pitching deals. For a while, there was none of that," says Larry Ulman, a former partner at Gibson Dunn who has worked on transactions for Relativity Media, David Ellison's Skydance Productions and others.
Universal, whose five-year pact with Elliott Management is set to expire in 2013, is said to be seeking as much as $500 million from investors looking for partnerships as long as five years, according to insiders. Fox and Sony similarly are on the hunt. And film-finance pro Schuyler Moore is helping raise $100 million for Singapore-based Infiniti Media Fund, backed by Carolco Pictures co-founder Mario Kassar.
It's likely, though, that the big banks won't invest in these and other projects that might pop up, say several financial experts, given their recent disappointments in Hollywood.
Goldman, for example, helped The Weinstein Co. launch in 2005 by arranging $500 million in financing and participating in a $490 million investment for an undisclosed stake. In 2010, TWC had to hand over control of more than 200 films from its library to creditors Goldman and an insurance company. This year, TWC made a final $40 million payment to settle its years-old credit arrangement with Goldman.
"It was a disaster," says one film financier. But others speculate that Goldman's fees on the deals were hefty enough to cover its losses. (Goldman didn't respond to a request for comment.) In another example, JPMorgan Chase and Credit Suisse First Boston led a bank syndicate that provided debt financing for the $4.8 billion leveraged buyout of MGM in 2004. By 2010, as the market turned, MGM declared bankruptcy and was taken over by Spyglass Entertainment executives Gary Barber and Roger Birnbaum. "Equity was wiped out in that deal," says the financier. "About 160 banks lost money. Every major bank had a piece of that thing."
Sometimes, say experts, the banks ended up with investments they didn't want. "The slate-financing wave was driven by a lot of the same forces as the subprime-mortgage wave," says one finance expert. "With both, the banks created loans with the idea they'd sell them to third parties, but they ended up holding a lot of that paper themselves."
Now, as deal activity ticks up, transactions such as former supermarket mogul Ron Burkle's recent investment of hundreds of millions in Relativity seem like the new normal. Plus, more money is coming in from such places as Russia and China. "It's less likely you'll see Goldman, Dresdner, JPMorgan or Merrill Lynch agent-ing slate deals today," says Stephen Prough, co-founder of Salem Partners. "They're shying away from the sort of structured finance that got them into trouble, so instead you'll see creative structures from specialized lenders and hedge funds."
Gone, too, will be the 15 percent fees studios took off of gross receipts. New deals will call for something closer to 8 percent, say insiders, and some also will insist on overhead caps. Other changes will seek to make Hollywood's notoriously opaque accounting more transparent.
Moore, for example, has been arguing for studios to reward investors with a percentage of box-office returns rather than complicated net-proceeds formulas, "so that you can open the trades the next day and know what you're entitled to."
At least one studio, Paramount, hopes that's not the case as it's locked in a legal battle with Melrose 2, a fund that put up $375 million to help finance, among others, Mission: Impossible III, Blades of Glory and the Transformers movies but says it hasn't made any profit.
"These kinds of deals were sold as low-risk with potentially high returns, but there was actually extreme volatility," says Prough. "Some deals worked -- like with Legendary Pictures, where the junior capital might have made 10 times their money -- but there were many more deals where the equity and mezzanine were wiped out and the senior took a loss."
While many point to the Legendary-Warner Bros. and Dune Capital-Fox partnerships as evidence that massive slate-financing deals can work if structured properly, other observers simply call it luck.
Dune, which opted for a string of random Fox movies rather than picking specific titles, had the good fortune that its slate included Avatar. Legendary, on the other hand, came close to failing, even though it had its pick of Warners films, excluding the Harry Potter franchise. After making money on 2005's Batman Begins, Legendary endured losses with such titles as Superman Returns and Lady in the Water. "Its one-third interest in 300 brought them back from the dead, allowed them to raise additional equity, and the next movie was [megahit] The Dark Knight," recalls one expert. Warner Bros. and Legendary declined comment.
If the big banks do come back to Hollywood, they'd be wise to take the Dune approach and not try to cherry-pick titles, says Ulman: "If you can figure out which movies are going to do well, you shouldn't be a banker -- you should be in the studio business."