Spyglass Offers Disney Lower-Risk Deals

In trying to find ways to manage risk in a capital-intensive, low-return business, Hollywood’s major studios have been increasingly depending on production outfits that can bring their own financing to the table and serve as reliable suppliers of top-grade product to their distribution pipelines.

Disney, operating under a recently instituted program to reduce its overhead and investment in movies, is the latest studio to jump on the lower-risk bandwagon and seek ways to finance movies off its balance sheet.

Thursday, the studio announced it had made an exclusive, five-year deal with Spyglass Entertainment, a newly formed entertainment company headed by producers Gary Barber and Roger Birnbaum, that aims to produce three to five movies a year financed through a combination of studio money, global alliances with international distributors and media companies, and backed by a large financial institution.

Barber, whose expertise lies in finance, particularly in the international marketplace, said Spyglass’ deals with various equity partners and an unnamed major U.S. bank were in the process of being finalized.

For producers like Barber and Birnbaum, such deals allow them to own the copyrights to their own movies and build a library while having access to a major U.S. distribution organization as globally powerful as Disney.

Spyglass joins the likes of such other studio-affiliated, self-financing outfits as New Regency Productions at 20th Century Fox, Mandalay Productions at Paramount Pictures, Phoenix Pictures at Sony and others.

Disney will put up a portion of the financing for the new company’s films and retain distribution rights in all media in the United States, Britain, Australia and Latin America--markets that account for nearly two-thirds of a film’s worldwide revenues. Spyglass will exploit its rights in all remaining territories through deals with international partners who will fund part of their budgets.

While Disney will probably wind up funding close to half of each budget, it doesn’t have to put any cash out up front, but rather when the pictures are delivered. Banks will provide production loans in these arrangements, which have become a popular way for studios to finance at least part of their movie slates.

“It’s definitely a lower-risk situation when you can use outside financing to in effect help finance development and production,” said Disney Studios Chairman Joe Roth, who came up with the idea of modeling Spyglass after other self-financing outfits such as New Regency Productions.

Roth was the catalyst for bringing Barber and Birnbaum together, having previously worked separately with each of them over the last 10 years. Birnbaum was president of production at 20th Century Fox under Roth, and Barber worked for Roth at Morgan Creek, a company Roth co-founded with owner James Robinson that also independently finances its films and distributes through Warner Bros.

Barber most recently served as the vice chairman and chief operating officer of Morgan Creek.

For four years Birnbaum has headed Disney-based Caravan Pictures, which was founded by Roth in 1993. Birnbaum oversaw the production of such movies as “Six Days, Seven Nights” and “While You Were Sleeping.” Caravan will become inactive as a production company after the release of its next three movies and the company’s key executives, including production President Jonathan Glickman, will assume roles in Spyglass.

Barber said the Disney deal is “mutually beneficial because it works for both of us in the current economic environment.”

The new alliance is a good strategic fit with Disney, which has just cut back on the number of movies it develops, produces and distributes each year. Recently, the studio combined the production operations of its two movie labels, Disney Pictures and Touchstone Pictures, into one unit.

“This is very consistent with wanting to minimize some of our investment in the motion picture business and have it managed by people we feel good about,” said Roth, who has said he wants to do “fewer talent deals and reduce our overhead and development costs.”

For studios, these arrangements are particularly attractive because they are relatively low-risk deals whereby they put up a portion of the budget and share in profits, as well as collecting a distribution fee for releasing in their designated territories.

In agreements with self-financing companies like Spyglass, studios typically collect lower-than-standard distribution fees of around 15%. (Standard fees run as high as 30% or more.)

Entertainment banker Lewis Horwitz, who works for a division of Imperial Bank that is going to be spun off Oct. 1 as a publicly traded finance company, said, “It’s all about distribution. They only produce because they have to feed their distribution pipelines. But, why put up money for production when they don’t have to and they can still get the fees?”

Horwitz predicts that the industry “will continue to see these kind of deals where the studios can cut their expenses and the huge risks involved in making movies.”

Rob Moore, who works under Roth as executive vice president and chief financial officer of the Disney Studios, said, “It gives us the opportunity to leverage our existing distribution organization. You can add three movies a year to your film slate without adding significant overhead to your organization.”

Disney will also provide all the prints and advertising money for Spyglass movies, which can today be as much or more than the production cost. However, the studio gets to recoup that money from the first dollar it receives back from the box-office take.

Disney has also made other contributions to the start-up, including a slate of movies projects from Caravan, and, according to sources, an initial financial advance of $10 million to $20 million against future overages.

Disney has the distribution rights to the movies in perpetuity but will have no equity position in Spyglass.