A Dilemma for Disney : Films in Its Latest Financing Deal Have Mostly Been Clunkers


Since new management was installed at Walt Disney Co. in 1984, no other studio has matched its track record in raising money for film production. Disney raised nearly $1.5 billion from 1985 through 1990 through a series of limited partnerships.

The most recent--Touchwood Pacific Partners I--raised $600 million. That's enough for about two years' worth of movie production, or 20 to 30 films.

The Touchwood money is expected to run out this fall and some analysts are betting that Disney won't return to the trough. Touchwood was sold to wealthy Japanese investors whose own economy has stumbled badly. Even worse, many of the Disney movies in the Touchwood deal so far have been real clunkers.

"Disney has to find a new way to finance films," said Emanuel Gerard, a partner in Gerard Klauer Mattison & Co., a New York investment research firm.

Disney, more than any other studio, has used other people's money to finance movies, giving away some profit potential but protecting shareholders from the precipitous losses that can come with movie-making. Wall Street has appreciated the resulting stability. But if Disney decides to use its own money, Wall Street will have to brace for more volatility in the company's earnings.

How bad have the Touchwood movies fared so far? "Newsies" and "Noises Off" grossed less than $3 million each at the box office. Five others (including the costly "Billy Bathgate") have grossed less than $20 million each. The best performer has been "Father of the Bride," which has sold more than $87 million in tickets since its December opening. With 10 Touchwood films released so far, the average box office gross hovers at $31 million, far below the $45 million average of the first 45 films produced or acquired by Disney from 1985 to mid-1990.

Disney management contends that it is unfair to judge Touchwood by the performance of its first 10 films, which represent less than half the slate. "It's only fair to judge the whole portfolio," said Richard Nanula, Disney's chief financial officer.

Indeed, some Hollywood executives believe that Disney deliberately cleared the deck of weaker films this spring to make way for summer movies with greater potential. Disney is pulling out all the stops in promoting its next few films. "Encino Man" will open in more than 2,000 theaters over this Memorial Day weekend amid an advertising blitz targeted at the teen-agers and young adults who made "Wayne's World" a huge hit for Paramount.

"Sister Act," starring Whoopi Goldberg, is another summer hopeful, scheduled to open the following weekend. Then, in mid-July, Disney has scheduled "Honey, I Blew Up the Kid," a costly sequel to "Honey, I Shrunk the Kids," which grossed $131 million for Disney in 1989.

But each of these three early summer releases needs to be a blockbuster, grossing $100 million or more, for Touchwood's box office average to surpass the lofty average established during Disney's hot streak in the late 1980s.

Box office revenue often determines how well a movie will sell in ancillary markets such as video, television and foreign outlets. Historically, Disney reaped an average $70.3 million from all markets on its first 45 films produced under the Michael Eisner-Jeffrey Katzenberg regime, and held down the average movie cost to $14.1 million, for an impressive 5-to-1 ratio of revenue to direct film cost.

By contrast, the first 10 Touchwood films may yield a dismal revenue-to-cost ratio of 2 to 1, according to one Wall Street analyst who follows the company closely but did not want to be identified. The analyst used a Disney model to project ancillary revenue for the Touchwood movies.

"If it keeps going like this, nobody's going to make any money," the analyst said, explaining that the direct costs do not include prints, advertising, residuals and third-party participations.

Not all box office revenue flows to Touchwood, of course. Roughly half the box office gross is retained by theater owners, with the remainder paid as "rentals" to Disney's Buena Vista distribution company. Under terms of the Touchwood deal, Buena Vista takes a 30% fee before any money flows to a joint venture set up between Disney and Touchwood. The joint venture then adjusts for third-party participations and residuals, paying 42% of the remainder to Buena Vista.

If Touchwood investors fail to recoup their initial investment within five years of the release of the last film, Disney is obligated to make up the shortfall, up to the full amount received in distribution fees. By structuring the deal this way, Disney's exposure is limited to its outlay on prints and advertising, which could run from $200 million to $300 million.

In many respects, Touchwood emulates the earlier Disney limited partnerships sold publicly in the United States, called Silver Screen Partners II, III and IV. But the Touchwood deal was a private placement, sold to fewer than 50 institutional or private investors, according to one source. As a result, Disney paid far less in fees. Touchwood actually offered just $191 million in limited partnership interests, and borrowed the remainder of the $600 million from banks. And unlike the Silver Screen deals, which profited handsomely from "Little Mermaid" and "Beauty and the Beast," Disney kept its new animated features out of the Touchwood deal.

"All Touchwood is, is a testament to (Disney's) brilliance," said Gerard, the Wall Street analyst. "They've had your money for nothing for five years."

For all these reasons, Disney may be loathe to start financing its own movies, even though interest rates have dropped to an attractive level. Nanula, the chief financial officer, said: "We think there is a good chance that we can do another film financing, but interest rates will make us look harder at it."

As for Touchwood, Nanula said he hasn't heard any complaints from the Japanese investors, despite reports that the offering was difficult to sell in 1990.

"We didn't take any heat from the Japanese," Nanula said. "The press wrote a lot about it."

Domestic Rentals Here's a list of selected domestic theatrical rentals of Touchwood Pacific Partners I films. Rentals are figured as 47.7% of gross box office receipts.

Film Rentals (in millions) "Father of the Bride" $41.6 "The Hand That $40.1 Rocks the Cradle"* "What About Bob?" $30.4 Avg. for 45 Disney $21.3 films from '85 to mid-'90 "Paradise" $8.9 "Straight Talk" $8.5 "Billy Bathgate" $7.4 "Ernest Scared Stupid" $6.7 "Passed Away" $1.7 "Newsies" $1.3 "Noises Off" $1.1

* Touchwood partnership owns just half.

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