Hollywood primes the pump for Mideast money


In the most recent season finale of HBO's "Entourage," a fictional Middle Eastern moneyman named Yair Marx emerged as a possible financial savior of a movie produced by the show's protagonist, Vincent Chase.

Vinnie turned down the money, but when the episode aired in September, HBO's sister company Warner Bros. Entertainment was quietly negotiating its own real-life infusion of Middle East funds. The studio struck a multibillion-dollar strategic alliance with Abu Dhabi Media Co., a new entity formed by the emirate, to create feature films and video games and to build an entertainment infrastructure in the region.

Warners isn't alone in seeing capital from petroleum-rich investors flow in. Sony, News Corp., Time Warner and Disney all have received investments from the region. Other top media execs say they are open to such deals, suggesting a new pipeline soon could bring a gusher of oil money to the industry.

"If an opportunity to obtain financing from the region comes up, we may do it," Viacom president and CEO Philippe Dauman told The Hollywood Reporter. Dauman was among the media players at this week's UBS investor conference who mentioned the trend and told stories of Gulfregion financiers who recently pitched themselves as possible partners.

"These are very sophisticated financial people who have shown they will make smart deals," Dauman said. "They make deals with leaders in industries, and we see ourselves as a leader in entertainment."

As the Dubai International Film Festival kicks off Sunday, more oil money likely will come flooding into the media and entertainment space.

Flush with cash from soaring fossil fuel prices, Middle Eastern investors are moving to diversify holdings by parking money overseas. Media companies are attractive thanks to depressed valuations and the weak U.S. dollar.

That, combined with Hollywood's enduring sexiness and a desire by some Gulf-region governments to develop alternate industries before oil reserves deplete, has led Dubai and fellow emirate Abu Dhabi to boost their entertainment investments. There also is developing interest from Qatar.

Buzz about petrol investment is on the rise at a time when the flow of private-equity money, which recently has played such a prominent role in entertainment, has dried up amid the global credit crunch.

The region will expand at a compound annual growth rate of 9.6% over the five-year forecast period, PricewaterhouseCoopers projects, on par with its prediction for gains in Asia. PwC predicts a 13.3% increase in Pan-Arab ad spending in the 2007-11 period and a 4.4% improvement in consumer/end-user spending on entertainment.

By comparison, PwC forecasts a U.S. compound annual growth rate of 5.8% in the same period.

No wonder that U.S. sector biggies have started pushing into the Gulf.

Among others, CBS Corp. is considering an entry into the billboard market in Dubai. Viacom has launched MTV Arabia, and the company and its partner Arab Media Group -- the largest media firm in the Emirates -- will start Nickelodeon Arabia next year. It also is contributing to a theme park in Dubai.

CBS president and CEO Leslie Moonves said this week that his team has received inquiries from the region about financing opportunities with the company's recently launched film unit.

"A couple of investors have approached us from there -- along with a lot of others -- but we have made no decisions" on how to finance CBS Films' initial slate, he said.

NBC Universal president and CEO Jeff Zucker echoed his peers, saying "we are continuing to be open to the possibility" of capital inflow from the Middle East.

Passive investors

Most petrodollar entertainment deals to date have fallen into two core categories: quiet minority investments in entertainment companies and deals that help a Gulf country develop its media infrastructure in return for financing content and allowing access to the fast-growing Mideast market.

Super-rich individuals and so-called sovereign wealth funds affiliated with Gulf-region governments have driven the passive investments, which account for the majority of money flow to date.

Prince Al Waleed bin Talal of Saudi Arabia, the nephew of the Saudi king who ranked 13th on this year's Forbes list of the world's billionaires, has spent a chunk of his $20 billion net worth, taking significant stakes in such media giants as Rupert Murdoch's News Corp., Time Warner and Disney.

The prince is believed to still hold all three stocks, but disclosures have been rare and rudimentary. He generally has been "a totally passive investor," according to one source with knowledge of the prince's dealings. But in 2004 and '05, he supported Murdoch against a possible threat from John Malone's Liberty Media.

Similarly, Dubai's Sheikh Mohammed bin Rashid Al Maktoum took a stake last month in Sony Corp. via an arm of investment firm Dubai International Capital. The size of the investment might be as much as $1.5 billion.

Sony is "a compelling investment case, consistent with our mandate of supporting premier global companies," said Sameer Al Ansari, executive chairman and CEO of Dubai International Capital. He praised the Sony brand, and a spokesman for DIC cited geographic diversification and Sony's undervalued stock as other reasons for the investment.

Home improvement

Gulf countries also have stepped up efforts to bring entertainment production and distribution to the region in return for providing funding and access.

Warners' deal with Abu Dhabi, the largest of the booming United Arab Emirates, is the prototype.

The partnership is driven by real estate developer ALDAR and the Abu Dhabi Media Co., a new government agency, and includes a $500 million feature film fund and a $500 million video game fund. It also covers the development of a theme park, a hotel and multiplex cinemas as well as the build-out of key infrastructure.

In addition, Warner Bros. Pictures International will work with Abu Dhabi Media to develop a slate of Arabic-language films for local and Pan-Arabic distribution. The chairman of Abu Dhabi Media, Mohammed Khalaf Al Mazrouei, said, "This agreement will put Abu Dhabi at the center of the world's entertainment map."

Both Dubai and Abu Dhabi have stated their intention to parlay petroleum wealth into becoming a regional hotbed for media and entertainment. "They have become rich from oil and are looking to do things that relate to non-oil opportunities in their own countries," one entertainment lawyer said. "They want to diversify before oil dries up."

Bret Saxon, co-founder and chairman of Insomnia Media Group, which recently received $550 million from Egypt-based asset management and brokerage firm Borak to fund movies and make acquisitions, said he regularly hears the word "diversification" when he travels to the Gulf. "It's a post-oil plan they are developing," he said.

Insomnia's deal doesn't require that films be shot in the Gulf region beyond the first production, which Saxon said is a war epic partly set in the Mideast that will be shot in Egypt, Morocco and Los Angeles. But the build-out of local production capabilities clearly is a goal of Mideast financiers, and they might be willing to take a long view of their return on investment.

"Unlike traditional private equity, these investors have a much longer investment horizon, which matches up well with the entertainment industry," said Wade Layton, managing director at financial services firm CIT Communications, Media & Entertainment.

However, pure film slate financing deals, which have been popular with private-equity firms, so far have not been so appealing for Arab moneymen even though some of the moguls mention them as a possibility.

"We have been exploring the Arab connection and were looking at heading to Dubai for the film festival but had less than robust interest in the slate structures," said Laura Fazio, managing director and global head of media and entertainment at Deutsche Bank in New York.

"They aren't -- not yet, at least -- interested in financing Hollywood movies just for that sake," an entertainment lawyer added. "They do it as part of a broader strategic idea."

Culture concerns

The rising profile of Arab media financiers prompts some to wonder when -- rather than if -- cultural and other conflicts will emerge in cases where Mideast money has more than a passive role in entertainment ventures.

Hal Vogel, a longtime media analyst and president of Vogel Capital Management, believes that for Mideast investors, "there's plenty of money around, there's a need to diversify, and there's a desire to become respected and have an influence on global political thinking and culture. The last point is where the problems start."

The kind of product that will come out of the Warners-Abu Dhabi relationship will be particularly interesting in this respect. The partners have yet to announce any film projects but could do so by year's end.

Warners chairman and CEO Barry Meyer told The Reporter in announcing the deal that the partners will "of course honor local tastes and sensibilities," signaling that cultural sensitivities will be a focus area.

The partners in the Insomnia deal formalized only one key rule of decency as part of the pact. "The only thing they asked us is to have no sex scenes because that's against their culture," Saxon said.

Added Borak founder and chairman Ayman Kandeel, who struck the Insomnia deal with Saxon: "If the opportunity arises for a film project that would treat this region and its people in a fair way and that also makes sense from a business standpoint, then that is certainly a possibility." But the goal is to create "traditional Hollywood content without limiting the company's ability to make the right film choices."

For media companies with mature businesses in the U.S., any ties to the Mideast could help in continuing their push into one of the red-hot growth markets.

Said Viacom CEO Dauman, "We see the Middle East as another emerging market with significant opportunities."

Gulf stream: In addition to established sector player Saudi Prince Al Waleed, several Middle East investors recently have put capital into entertainment companies

Target: Warner Bros. Entertainment   
Investor: ALDAR and Abu Dhabi Media Co.
Announced: Sept. 26   
A broad-based strategic alliance including $500 million feature film fund, $500 million video game fund and plans to build out entertainment infrastructure

Target: Sony Corp.   
Investor: Dubai International Capital   
Announced: Nov. 26
Acquisition of a stake in Sony of less than 5%, likely in the $1 billion-$1.5 billion range

Target: Insomnia Media Group   
Investor: Borak Holding   
Announced: Nov. 27
Egypt asset management and brokerage firm Borak Holding creates $550 million fund for movie projects, acquisitions of film libraries and other entertainment properties

Target: News Corp., Time Warner, Disney   
Investor: Saudi Prince Al Waleed   
Announced: Ongoing
Minority stakes in entertainment conglomerates

Correspondent Mark Evans in Dubai contributed to this report