Credit Crunch Hits Hollywood Studios
THIS WEEK, THE HOLLYWOOD STUDIOS — those Big Media fortresses of big money and even bigger morons — received a nasty shock when the worldwide credit crunch began arriving at their front door unannounced. The warning bell was sounded by an unfolding story about whether venerable Paramount was having a financing crisis or not.
Paramount denied a Financial Times newspaper account that Deutsche Bank pulled out of a $450 million financing deal to mitigate the studio’s risk on 30 films. My insiders at the studio are confirming that Paramount and Deutsche Bank did not consummate the deal, involving hundreds of millions of dollars, to underwrite future movies. But the Paramount sources maintain they were the ones who walked away two weeks ago and that, soon after, Deutsche Bank’s film-financing arm shuttered.
Actually, I’ve now found out that both versions are sorta true: Deutsche Bank found a bunch of outside dough and then committed itself to $150 mil. But when it went out to other banks to syndicate an additional $150 mil, trouble ensued. When the financing deal shrank, and the terms worsened, Paramount said forget it. And then Deutsche Bank closed its film-financing arm like so many other major financial institutions and funds have done over the past two years.
To combat the bad PR, Paramount insists this financing isn’t critical. True enough. These financing deals are not crucial for survival, but they do help a studio to mitigate its risk. That’s why Fox has its Dune deal, Warner Bros. has Legendary, Disney has Kingdom, both Sony and Universal have Relativity, United Artists has Merrill Lynch funding, and MGM is still looking for its financial partner.
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Under normal circumstances, Paramount would have been able to replace Deutsche Bank fairly easily. But Paramount insiders say that, for now and the immediate future, the studio will suspend looking for an overall financial partner until the credit crunch is over. But at some point in the future, its parent company, Viacom, may find itself solely on the hook for financing a new slate of pictures — which is like a tightrope walker working without a net.
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“Viacom is zero upset about this,” one source at the studio assures me. “It’s much ado about nothing. All I know is that we’re covered.” That’s because Paramount says individual partners are helping to finance its upcoming slate of films on a one-by-one basis: Level 1 is helping to underwrite Star Trek, Spyglass is aiding G.I. Joe, Transformers 2’s deal is with Melrose 2, and The Curious Case Of Benjamin Button is a coproduction with Warner Bros. “So on all of our biggest movies over the next year, we already had a partner,” a Paramount insider tells me.
And the studio says it will continue financing each pic with an outside partner or as a coproduction with another Hollywood studio. “We like those deals and economics much better. They’re far stronger for us,” an insider at the studio assures me. “We’re very comfortable, as is Viacom, with our business plan.”
Within hours of the Paramount news, rumors began swirling that Fox Filmed Entertainment was having a problem with its long-standing arrangement with Dune Entertainment’s $570 million financing of some 66 films over five years. My Fox sources explained that Dune’s multi-billion-dollar parent company, Dune Capital LLC, elected to close down one of its hedge funds and wire back the money to investors, and that is what sparked the rumor. I’m assured by many sources that all the money was already earmarked for the Fox/Dune deal. Thus, crisis averted
I first heard about the Paramount situation on July 11 from a source who mentioned it in passing. According to my sources: Paramount’s COO Frederick Huntsberry, CFO Mark Badagliacca, and SVP of capital management Mark Pinkerton had been negotiating with Deutsche Bank for an overall deal for 30 films that financed 25 percent of each movie, capped at $50 million. Also contributing would be Qualia Capital, the bicoastal media and entertainment investment fund. That’s how the newly named “Melrose Pandora” deal reached $450 million.
By late spring, the credit markets had changed dramatically because of the nationwide mortgage-lending crisis, soaring oil prices and everything else wrong with today’s rotten economy. So a lot of banks were skittish about lending in general, let alone film financing.
At this point, the potential financial partners came back to the Paramount trio with the bad news and changed terms. Instead of a 25 percent equity investment, it was only going to be 20 percent, and accompanying that was a load of lousy conditions.
So, about a month ago, Huntsberry, Badagliacca and Pinkerton came to their Paramount bosses with a status report. And Brad Grey et al. didn’t like the deal anymore. “It was not strong enough. It gave too much money away if the pics do well and not offset enough of the risk if the pics don’t,” an insider told me. “So we notified them two weeks ago that the deal didn’t make any economic sense and there was no point to this. What we decided was to walk away. And having lost this piece of business, they shut the division down.”
An outside-the-studio source told me that Paramount’s current financing problems also stem from the fact that the new management hasn’t built up a good enough movie track record. Because if it hadn’t been for DreamWorks, DreamWorks Animation, Marvel and Steven Spielberg, the Paramount balance sheet over the past two and a half years would look like a disaster area.
Sure, the studio has boasted about making $2 billion at the box office worldwide already in 2008. But a breakdown demonstrates that the studio itself isn’t responsible.
DreamWorks was purchased at the end of 2005 to get Paramount over the worst of a coming dry spell. And then DreamWorks proceeded to put Paramount at the top of studio box-office share in 2006 and 2007 with hits like Disturbia, Transformers, Norbit, etc. As did DreamWorks Animation, which Paramount is distributing until 2010, and whose Kung Fu Panda is keeping Paramount competitive. But the studio only receives distribution fees.
Same story with Marvel’s Iron Man, which gives Paramount box-office boasting rights but only distribution fees. Even Paramount’s Indiana Jones and the Kingdom of the Crystal Skull comes with an asterisk because it’s unclear how much of a pittance of worldwide gross the studio gets to keep after Steven Spielberg and George Lucas receive their massive first-dollar-gross payouts.
But very soon, DreamWorks will be leaving Paramount, and DreamWorks Animation can follow a year and a half later. Of course, a lot of projects will be left behind. That is but one reason the studio could have a profitable outlook on the horizon because of Transformers 2, Star Trek and G.I. Joe — all probable blockbusters.
Of course, the financing-woes news broke as Paramount bosses were winging to NYC for a long-range planning meeting with parent company Viacom. That’s really bad timing. But the studio is shaking off the headlines. As one insider put it to me, “Paramount has been around for 100 years. And it will be around for a very long time.”
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