The Borat Effect
The Financial Times yesterday reports that Borat's runaway success has opened the door for more investment by hedge funds into Hollywood, a theme that has caused rolling eyes here at Going Private just as long as it has been a flash in the pan.
Sayth the FT:
20th Century Fox is set to announce a hedge fund-backed film financing deal worth more than $520m thanks to the box office success of Borat and The Devil Wears Prada.
The agreement, which comes amid increasing hedge fund and private-equity interest in Hollywood, will see Dune Capital Management refinance a slate deal – or agreement to produce several films – it struck with Fox at the end of 2005. An announcement on the new slate could come in the next few days, according to a person familiar with the situation.
I predict disaster.
After reading the FT I found that the "Film Funding Blog" thinks I'm being hard on Cruise and seems to think this financing structure is all old-hat. But, then again, they don't seem to know the difference between revenue and net income (in my not entirely limited experience a very common problem in Hollywood). I'm not sure they understand the structure of film production financing, or the nature and purpose of the many preferences that plague such financings. Clearly, the ramifications of changes in these structures in the Cruise case and way they give Cruise a major pay and status cut are lost on the authors. This is a pity, since they purport to be experts on the subject.
Suddenly apologist for MI3, the Film Funding Blog quips:
MI3 is widely considered to be a flop, but that seems to be more the characterization of some bitter Hollywood types. MI3 has a worldwide box office gross nearing $400M. While more of these revenues were generated outside of the U.S., that is less a commentary on the film and more a statement of the importance of international distribution.
Budget estimates on the film vary, but range between $150 - $220 million in production, marketing and development costs. Just to keep things in perspective, The first Mission: Impossible grossed $181M in 1996, ten years ago, to MI3's 133.5 million domestic gross now that it's run is basically over. Note that the MI3 figures are not adjusted for the 10 years of inflation since the first installment of the franchise. Note also that MI2 took in $215.4M in 2000. Any way you cut it, MI3 was a domestic bomb. The domestic box office didn't even break the movie even, and the studio's cut is subject to other preferences before they see a dime.
As for the international box office, which our favorite film financing blog claims is the gem in the rough for MI3, MI2 has pulled in $330 million to date. MI3 is stuck at $262 in foreign sales and, again, that's without an inflation adjustment for the 6 years between the two films. This leaves MI3 82nd on the list of worldwide box office receipts and 187th for the domestic box office. Not all that stunning.
Once you understand the dynamics of Hollywood finance, specifically the comprehensive and willful blindness to real results and their concentration on obscure revenue numbers without the most basic profit analysis, it is easy to see why those without basic finance skills, or the inability to shade their eyes from the glow of star power, are drawn to invest in the industry. $400 million in revenue! Wow! Who do I make the check out to?
It is also pretty easy to see why Cruise was sent packing, and, reading the apologists, why Hollywood film financing is among the least financially competent fields around.
But the real hint on what's going on here with the new hedge fund money lies in the middle of the FT article. Right about here (emphasis mine):
Under the refinancing, Dune, formerly controlled by George Soros, the billionaire financier, will invest in at least 15 new films. These will include the fourth installment in the Bruce Willis Die Hard franchise and Fantastic Four: Rise of the Silver Surfer.
Hah! Suckers.
