The Line on New Line: A Tough Sell

Will the company known for "Nightmare on Elm Street" turn into the Nightmare on Wall Street for investment bankers trying to sell it?

Industry analysts and Hollywood executives think New Line could be a tough sell, especially because the once-hot company stumbled badly this year and the general state of the movie business is depressed.

"There's no great stampede to get into the business, especially at such high prices," says Harold Vogel, an analyst with Cowen & Co. "Wall Street is basically sour on the business . . . it's going to be a difficult year for the whole industry because there are a lot of high-priced films and not enough space."

About a month ago, Time Warner Inc., which acquired New Line Cinema in its recent acquisition of Turner Broadcasting System, gave the green light to New York investment banker Furman Selz to shop the 30-year-old company to potential investors and buyers. With Warner Bros. already in its fold, debt-heavy Time Warner doesn't need another studio and is more than eager to find ways to pay down debt.

As recently as a year ago, suitors might have lined up at New Line's door to buy one of the most promising movie companies in Hollywood. That was when the tightly managed company was riding high on a strategy of making inexpensive or mid-priced films such as "Dumb and Dumber," "The Mask" and "Seven" that were staggeringly profitable when they became hits.

But a move into the big-budget arena hasn't worked out. To date, New Line has had a bad year at the box office, with such expensive bombs as "The Long Kiss Goodnight," "Last Man Standing" and "The Island of Dr. Moreau." Of its recent releases, only "Set It Off," a low-budget film at $10 million, is solidly in the black.

Also discouraging suitors is that the movie business at large has seen a lot of red ink, with more likely to follow. Film making and marketing costs have soared, made worse by the number of movies Hollywood has been releasing.

New Line's sister company, Castle Rock Entertainment, for one, has suffered heavy write-offs in its movie division and has found itself unsalable. Time Warner is expected to seek outside investors to help bankroll the company, which now looks as if it will remain in the Warner Bros. family but making fewer movies--five or six--a year.

Last month, Time Warner said it is shuttering its Turner Pictures unit because of the redundancy with Warner Bros.

A prominent Wall Street analyst says that a sizable sale of New Line "could be tough because there are a limited number of buyers."

Vogel suggests that "there are buyers out there; it's a question of price."

More likely scenarios include Time Warner hanging on to a minority stake and bringing in other investors. One possibility is an internal buyout led by New Line founder and Chairman Robert Shaye and President Michael Lynne, with the help of a Wall Street firm such as Allen & Co.

Analysts agree that New Line's box office slide has hurt the company's valuation, which was once thought to be more than $1 billion and is now believed to be more like $700 million to $800 million.

Unlike MGM, which sold earlier this year for $1.3 billion to Kirk Kerkorian and Seven Network, New Line doesn't have the extensive library or a worldwide logo that that historic studio does.

A few weeks ago, Furman Selz sent booklets on New Line to about 10 potential buyers, including PolyGram, NBC parent General Electric, Ron Perelman, German media giant Bertelsmann, Korean industrial giant Daewoo and at least two investment firms.

But sources say PolyGram, NBC, Perelman and Bertelsmann are not interested. Neither are any of the major studios or large film companies. Sources say the most active interest is coming from several international companies, one or two U.S. based media companies, and passive financial investors.

Something daunting to a potential buyer or investor would be New Line's negative cash flow. A new owner would have to infuse a minimum of $300 million of operating capital, based on what New Line shows in its book as projected negative cash flow for the next two years, according to sources.

Although New Line continues to show a profit every year and expects about $50 million a year over the next three years, the company has had negative cash flow since being bought by Turner in 1993 and making bigger-budget movies. The discrepancy is attributed to movie accounting practices whereby films are amortized over a period of time and won't show profits for several years.

New Line executives wouldn't comment. Insiders portray the cash flow as a temporary problem and say the company is fundamentally sound. Still, top New Line executives are openly grumbling about the company's performance, according to insiders, with bonuses expected to be cut substantially from years past. As a result, morale is low.

One source who's reviewed the book said he doesn't believe potential buyers are evaluating the company based on its numbers.

"It's about whether you believe in the management and their track record, which has been great up until the past year; the company's market position; and what you have to contribute in cash--the other things don't matter."

New Line, long known for producing and marketing movies at well below the industry average cost, began getting into trouble when it started competing in the bigger-budget picture business once it had access to Turner's deeper pockets. The company went on an uncharacteristic spending spree, paying more than market prices for talent and material, including a record $4 million for Shane Black's script for "The Long Kiss Goodnight."

Sources say several of the parties that received the New Line book are unlikely to make a play for the company, among them PolyGram, which earlier this year made a bid for MGM.

Where MGM might have made sense for PolyGram, which bid $1.3 billion, New Line doesn't for various reasons, not the least of which is a management issue. If PolyGram were to buy the company, its movie chief, Michael Kuhn, would want to run the show, something that New Line's Shaye and Lynne would never agree to. When Turner bought the company, Shaye and Lynne were contractually guaranteed autonomy even in the event of a sale. Aside from that, New Line wouldn't provide PolyGram with as extensive a library catalog. New Line has about 800 film and TV shows in its library, a fraction of MGM's library, which has 1,600 movie titles alone.

Although GE has the deepest pockets of the group, the company's interest in New Line is said to be lukewarm. GE has looked at going into the film business in the past, such as when MGM was for sale, but has always decided against making the plunge.

Sources at Bertelsmann say the company is definitely not interested in buying New Line and Perelman is also passing, according to sources close to him.

Whenever you're on hold . . .

Callers who get put on hold this time of year usually get holiday music. At Universal Studios Inc., you get Edgar.

One song callers to the company's executive suite have been hearing when put on hold is "Whenever There Is Love," the song Edgar Bronfman Jr., chief executive of parent Seagram Co., wrote for the Universal movie "Daylight" under the pen name Sam Roman. Bronfman wrote the song for the Sylvester Stallone action film with longtime songwriting partner Bruce Roberts, who sings it with Donna Summer.

"Daylight" has been a dud. Pretty soon, getting put on hold may be the only way to hear the song.

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