With signs that all is right with the world once again, specifically, the return of the always yummy Abnormal Returns, it seems safe to emerge from the quiet period I have enjoyed the last many weeks. Much has passed since I hosted your interest, dear reader, but it took Tom Cruise to finally rouse me from my literary slumber.
Massive Preferences for "Certain Investors"
Tom Cruise, and, of course,
Dr. Mark Klein
For MGM, which is owned by private equity firms in partnership with the Comcast Corporation, and the Sony Corporation, the deal offers an alliance with a major star on terms more manageable than the huge fees he commanded from Viacom’s Paramount Pictures for expensive films like last May’s “Mission: Impossible III.” It also offers a way to unlock the value of the United Artists name, which carries enormous cachet, but has been attached to only a few films lately.
The deal also offers a fresh twist on recent trends that have seen investors become directly involved with film producers, even as stars seek more creative and financial control over their careers. Established producers like Joel Silver and Ivan Reitman are among those who have made partnerships with outside investors, allowing them to finance films intended for distribution by studios.
Initially, Mr. Cruise and Ms. Wagner will have authority to produce about four movies a year, for distribution by MGM. Neither Mr. Cruise nor Ms. Wagner put up any capital, Ms. Wagner said. Mr. Cruise may or may not star in the pictures, and will remain free to work as an actor for other studios.
Mr. Sloan and his team have been working to revive MGM as a full-blown movie and television distribution company. Last year, several producers in Hollywood had sought to buy United Artists but were unsuccessful. So far MGM’s recent track record as a distributor of other producers’ movies is unimpressive.
Both the DealBook piece and the New York Times suggest this is a new and revolutionary form of financing for film production. In fact, it is not anything like new and revolutionary finance. What is new and revolutionary is the wonderfully refreshing spanking delivered to spoiled stars like Cruise, and a formalized setup to drag Vegetable Capital into Hollywood.
We've gone over this topic, that is the exploitative nature of Hollywood finance with respect to outsiders, more than once here at Going Private. We've also touched on the somewhat silly, former state of affairs for "the talent" (to clarify, that means Tom Cruise in this context).
This recent news is sort of amusing, because back in August the Wall Street Journal was quipping:
First and Goal LLC, whose backers include Six Flags Inc. Chairman Daniel Snyder, who owns the Redskins, and Six Flags CEO Mark Shapiro, will put up cash each year for offices, staff and costs associated with developing movies at Mr. Cruise's Cruise/Wagner Productions. Their investment, which sources familiar with the deal said was about $3 million a year, doesn't include movie-production financing, which the production company will have to come up with separately.
Sounds like that deal fell through, quietly. Interesting, however, that now Cruise's deal is thinner still. That is, his return is burdened by investor preferences senior to his cut. Cruise is suddenly in a similar situation that outsiders looking to absorb some of the warm glow of Hollywood stardom by investing in a film or two used to find themselves in. I outlined this setup with the help of the Journal and the New York Times back in April thusly:
Reading the Journal article it becomes clear that all the people in line in front of an equity investor when it comes time to pay out, including exhibitors, the studio distribution fees, payback for production and marketing costs, actors and directors, make up for a pretty large black hole that has to be filled before investors see a dime. It must feel quite like being a later stage investor coming in behind a massive wall of pre-existing preferences. (That sounds redundant). The Journal gives "Batman Begins" as an example. $150 million in budgeted costs, $372 million in worldwide ticket sales and Kavanaugh's investment entity, "Legendary Pictures LLC," is still in the red by "several million dollars."
The balance of power has shifted significantly against stars. Part of that might be explained in this DealBook quote here: "Neither Mr. Cruise nor Ms. Wagner put up any capital, Ms. Wagner said." The rest might best be understood by reading between the lines here: "If investors are not interested in financing the films, MGM said it would pay for them all."
What we have here is a Vegetable Capital fishing expedition. MGM wants to pull in outsider money into the coffers so it can direct its attention to sure things. Meanwhile, as to the the riskier projects, those that aren't part of an existing franchise, well that's where the Vegetable Capital comes in. What's interesting is that, while this had become the norm, the only way the deal would fly this time was to throw Cruise and Wagner on the other side of the preferences. Apparently this segment of Vegetable Capital is getting a bit smarter, even if it is still part of the Platyhelminthes phylum. Even Cruise won't invest in his own films. What does that tell you?
Well, MGM's Chairman, Harry E. Sloan has it all figured out. How do you avoid scaring off investors with a film flop or two? "We’ll take the model out to investors before the first picture opens." Still, don't worry, Dr. Mark Klein won't be investing. According to him:
Besides terrible scripts and relentless anti-male propaganda, contemporary movie soundtracks are very distracting and much too loud. Don’t need much of a sound track with a really good story played by properly directed strong actors. Almost no music in “On the Beach”, “Paths of Glory” and the “Best Years of Our Lives”.
That also goes for store music. One reason I shop mostly online is I hate being bombarded by love songs. For most men nowadays reminders of romantic love doesn’t bring up pleasant memories!
Definitely sounds like projection to me.