There has been a fair amount of speculation since producer Robert Simonds, TPG Growth, Gigi Pritzker and Chinese concern Hony Capital announced their plans for “a next generation film studio” to finance, produce and self-distribute eight to 10 star-driven films every year. The group has already gone around the traditional business model in making deals for screen plays directly with the nation’s exhibitors and it will also make other output for home video, pay and other ancillaries. It also boldly announced that they would spend $1B over the next five years. When folks around town heard that, they rolled their eyes. After all, there is a history of largess announcements with Chinese investors only to find out later that it’s not real. So who better to confirm than with the bankers.
According to JP Morgan’s David Shaheen, the head of the financial institution’s entertainment banking team for the past 18 years, the deal is closed. “The funding is in place. We’ve been working with them for the past year and in earnest the last several months,” he said. “We were engaged from the beginning evaluating their business strategy and helped structure the financing. The combination of the equity capitalization that has been funded, the subordinated debt capital, the prints and advertising facility, and the senior debt revolving line of credit are sufficient to fund the production and releasing of film (and television content) for the term of the deal.” Which is? “Five to six years.” The prints and advertising facility is being handled by a separate company. But a billion dollars? “It’s fair to say that the capital is there,” says Shaheen. The Raine Group also served as the financial adviser to the studio.
Shaheen added that he was impressed with “the quality of the shareholders — all blue-chip players — including their exhibition partners and how they were able to pull the ingredients together. The capital is in place and ready to go. I’ve gotten some calls on this, too, from people around town wondering if this was real. I don’t know what else to tell you but it’s real.” It’s basically a revolver financial structure, which means that they can tap into larger resources if needed.
Also, the exhibitors — AMC Theaters, Regal Entertainment Group, Cinemark and Carmike — have all negotiated separately with the joint venture. In order to agree, they also needed assurance, which was provided. They all put a conditionality on the agreement that they had to see the capital to produce the films before they would make an agreement to offer them a certain amount of screens each year. By making deals directly with the theater owners, it is a major shift away from the traditional way of doing business with exhibition.
And the Chinese? The largest stakeholder in the new venture is actually TPG Growth, a global private investment firm which is backed by parent TPG which together have invested in CAA, Sabre Holdings (Travelocity), Evolution Media Growth Partners, and Univision, to name a few. The head of TPG Growth, Bill McGlashan, lived in China for five years and has done business with the Chinese for 25 years. “We’ve known Hony as a firm since it started and it has a joint venture and is an investor in Shanghai Media Group. We’re a big investor in China. So we know each other and trust each other. The relationships really matter there. It’s quite collaborative with the Shanghai Media Group. We’re not only going to develop content for here but also for the Chinese market. The thirst for global content is unquestionable right now and we can get top talent from there and put them into content here. With this relationship, we are able to leverage their experience in distribution in the country. They control a lot of infrastructure. By the way, in the end, it wasn’t raising the capital that was the challenge, it was making sure we had the right partners.”
The venture began two and a half years ago with Simonds and McGlashan who are both on the Yale School of Management Board. After a board dinner, the two began talking about the state of the entertainment industry. Simonds mentioned the move by the Hollywood studios towards big, blockbuster films and how the lower end (medium-sized budgeted films) — are almost non-existent with the studio’s new model. The take-away was if you make films anywhere from $20M-$60M with a star in the right genre “in their sweet spot” as McGlashan says, the reality is that there is an appetite for that the film — with audiences and with exhibition.
Now, I must interject … many years ago, I did an investigation into who was the most profitable filmmaker at any of the major studios. The surprising result after combing through films, box office grosses, budgets (basically hoards of data), was that Simonds — known for producing Adam Sandler-starring comedies, just mid-budget comedies — had a better track record than most of the big-name producers in Hollywood. No, I’m not kidding. In fact, I think the only one who wasn’t surprised by that was Tom Pollock, the chairman of Universal Studios where Simonds’ had his deal. Simonds has produced about 30 films including The Wedding Singer, Happy Gilmore, Cheaper By The Dozen, Pink Panther, and This Means War. Simonds, who looks like a kid, is a very good businessman.
“I know Bob has a huge respect for capital so he is exactly the kind of person I want to work with,” said McGlashan. “He was the only guy who made sense for us to be in business with. We leveraged Bob’s capabilities and the model that he already knows and has made a nice living with and created tremendous value together. And we do billions of financing through our firm every year. This is not a film fund, it’s an actual studio. We’re going to be doing deals with many people, but we cannot drift into a model that does not respect capital.”
The group plans to hire 63 people, mostly in marketing and distribution, says Simonds, who is the chairman and CEO of the yet unnamed studio. The budgets for the films will be anywhere from $20M-$60M, depending on the elements. The group has already spent $8M incubating the company by developing television and film projects and they plan to hit the ground running with four films in the marketplace next year, then six the following year (2016) and then eight a year moving forward thereafter. The average budget will be $40M with a marketing and distribution budget on average of $35M domestically. Internationally, a foreign pre-sale model will be put in place, however, an output deal ala DreamWorks’ business model, is not out of the question.
“We want to be a place where the star can come and we build a movie around them like a custom suit,” said Simonds. “We have different way of approaching and paying the talent but we have the philosophy of maximizing the economics for the star. If a star makes the perfect movie for their audience, then everyone wins. You just need to build a movie around a star’s particular strengths.” It’s the if you build it, they will come philosophy.
It’s going to be a wild year to enter the marketplace as 2015 is shaping up to be sequel heaven … or hell, depending on your viewpoint … with so many titles entering the marketplace that it’s going to be back-to-back franchise monsters: Superman vs. Batman vs. The Avengers vs. Mad Max vs. Fast & Furious vs. Jurassic Park vs. Terminator vs. Fantastic Four 3D, Marvel’s Ant-Man vs. Assassins vs. Untitled Bourne Identity, and then James Bond vs. Star Wars vs. The Hunger Games: Mockingjay, Part 2 vs. Mission Impossible for top film of the year.
“We are definitely paying attention, but if you look back, there are lots of moments in time over the past three to four years where pictures could have found room and could have played well,” said general counsel and exec VP Noah Fogelson (former CEO of Crest Animation). “What we’re trying to do is be very strategic and sit down with the exhibitors and figure out what makes sense to do and when.” He said they will be getting the same number of screens as the major studio films receive, and that exhibitors want studio-caliber content in between the tentpoles and that’s what this new studio aims to provide.
They remain mum on the projects currently in development, but the previously announced State Of Affairs with Joe Carnahan and Katherine Heigl — about a CIA officer who becomes the President’s daily briefer — is one of the things that was developed and later sold to NBC — though it was done before the full financing was in place for the studio. Simonds is exec producing State Of Affairs. Any money, ancillary or otherwise, made from that project will go back into the studio. In regards to television, one of the group’s board members is Tony Vinciquerra, who is the former chairman and CEO of Fox Networks Group, so he will be instrumental in the putting in place studio’s strategy for its TV business.
The group is currently negotiating for office space and is putting feelers out to hire staff and gearing up for releasing films in first-quarter 2015. “We want to hire the smartest people around,” said Simonds. “We are looking for people who not only understand where the market is right now, but understand through their expertise where it’s going to go. We want the kind staff that can capitalize on that knowledge and give them the tools to propel us forward.”
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