Post-Production Firms Join Trend of Consolidation

Consolidation has been a trend among movie studios, television networks and production companies for years. Now another significant, though less sexy, consolidation is occurring--in the post-production business.

For years, a fragmented network of post-production firms has serviced the studios; dozens of these companies are clustered around Hollywood, Burbank and the Westside. Two major publicly traded players, Todd-AO Corp. and Four Media Co., or 4MC, in particular have made a string of acquisitions over the last few years.

Last week, 4MC announced its largest acquisition, agreeing to pay about $69 million for MSCL Inc., commonly known as Encore Group.

Consolidation allows post-production firms to spread the risk of major investments in equipment across a wider spectrum of businesses.

The field encompasses a wide range of specialized businesses that work on films, TV shows and commercials from the rough, unedited form through completion. These include creating computer special effects for film and TV, inserting sound effects and dialogue into programs, transferring film to videotape, dubbing films into other languages and editing.

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The equipment can be costly: A high-definition film-to-video transfer machine or a large mixing board for digital sound can easily cost more than $1 million--and may require updating frequently.

About half of all post-production work today is contracted out by the studios, analysts estimate. Total expenditures are about $8 billion worldwide; that amount is expected to grow substantially with a surge in international demand and new digital platforms, such as digital videodisc.

“After the major technological shifts of the last 10 years--the big one being from analog to digital--we’re now at a reasonably stable point in the business, where equipment you invest in isn’t as likely to become instantly obsolete,” said Christopher Dixon, an entertainment analyst with PaineWebber.

Dixon said that for this reason, and due to a general surge in production, the field has become attractive to investors. The two biggest players, 4MC and Todd-AO, are headquartered in the Los Angeles area but have strong and growing operations overseas.

4MC opened an $18-million facility in Singapore in 1995, a co-venture with Viacom Inc. In Los Angeles last year, it bought Pacific Ocean Post, a leading facility specializing in commercial and TV work.

Todd-AO announced plans last year for a dubbing facility in Germany, in conjunction with Walt Disney Co.; it should open in fall 1999 and be used to dub Disney’s animated fare into dozens of languages. Locally, the company paid $31 million last year to acquire Hollywood Digital, a leading full-service post-production firm. This spring, Todd-AO/Hollywood Digital West opened in Santa Monica to serve the growing advertising market.

“We may have reached somewhat of a peak in movie production and special effects,” said Alan Kassan, an analyst at Deutsche Morgan Grenfell, “but TV and advertising post-production are going to be a high-growth segment.”

Still, the stock of both Todd-AO and 4MC have taken a beating in the recent market downturn. Todd-AO closed Wednesday at $7.38, down from a high of $13 in May. 4MC’s stock closed at $3.75 on Nasdaq, down from $11.50 in April.

The top executives at 4MC and Todd-AO couldn’t be more different. Rob Walston, chairman of 5-year-old 4MC, is a fair-haired, 40-year-old former Wall Street investment banker who entered the business in 1993. His former boss, investor Michael Steinhardt, controls nearly a third of 4MC’s stock; Walston owns about 15%.

In an interview, Walston is serious and intense, seeming to derive great pleasure from reeling off facts and figures about the business.

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Todd-AO President and Chief Executive Salah Hassanein is a 77-year-old veteran of the film exhibition business; he has been a director of Todd-AO since 1962, 10 years after it was founded. The native Egyptian came to the U.S. after World War II and later became a top executive at United Artists Theatres and Warner Bros. International Theatres. He comes across as gregarious, charming and tough.

Five years ago, Todd-AO was a respected but somewhat stagnant firm that worked on sound for films. Its Hollywood heritage was impeccable: Co-founded by producer/promoter Mike Todd in 1952, the company and its personnel have been nominated for Academy Awards about two dozen times for such films as “The Sound of Music” and “E.T.: The Extra-Terrestrial.”

“Post--production . . . had become a multifaceted business, one with various formats and a need to branch out, both in terms of technology and geography,” said Hassanein, who became president of Todd-AO in 1994 and owns about 8.5% of its stock.

That same year, Todd-AO entered the video services business, performing such work as mastering and duplicating professional-grade video for broadcast. In 1995-96, Todd-AO acquired two London-based companies, Chrysalis and Filmatic, that processed film and prepared TV programs for satellite broadcast.

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Combined with the purchases of Hollywood Digital and several other firms, these acquisitions made Todd-AO a steadier business. “Three years ago, our business was 100% cyclical,” Hassanein said. “Now it’s about 50%; I’d like to get it down to 25%.”

Todd-AO also is seeking long-term relationships with studios to secure a steady stream of business. A prime example is its German co-venture with Disney. Additional joint ventures are being considered in Asia and several other European countries.

4MC--so named because of its four major areas of services, studio, broadcast, television and visual effects--is a bit larger and more diversified than Todd-AO. 4MC’s revenue for fiscal 1997 was $84.5 million, compared with Todd-AO’s $78.9 million.

Among 4MC’s major purchases have been Anderson Film Industries for $10 million in 1997 and Pacific Ocean Post for $27 million in 1998.

“In order to access capital, we need to get bigger,” 4MC’s Walston said. “We need capital because we’re still investing in making a fundamental change from analog to digital.”

So far, 4MC has invested more than $80 million in new systems and equipment. Though equipment and maintenance costs will remain relatively high, Walston expects the spending to level off. These costs provide barriers to competitors--and a compelling reason for smaller stand-alone companies to sell to 4MC and Todd-AO.

At the time 4MC acquired POP, POP co-founder and President Alan Kozlowski said the sale allowed him to “ensure our success without having to be an investment banker.”

Kozlowski and many key personnel at the other firms bought by the consolidators stay on as part of the deal. Walston recognizes that relationships often decide which post firm gets a project.

“We put a small-company face on a large-company structure. We can’t lose that intimate contact in those markets where that is important,” Walston said.

Of course, there is some wariness in response to consolidation.

“The biggest concern I’ve heard is that we’ll have an impact on pricing, that we’ll be able to set costs,” said Walston, who insists that, if anything, 4MC should be able to provide services at a more competitive rate because of economies of scale.

Although 4MC and Todd-AO are the biggest publicly traded post-production companies, the business is still fragmented. According to Kassan of Deutsche Morgan Grenfell, there are more than 200 post-production companies with annual revenues in excess of $10 million.

Other large public companies include New York-based Unitel Video and Los Angeles-based VDI Media. Many of the stand-alone companies are considering buyout offers.

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Smaller post-production companies are watching the consolidation of the business closely. “We’ve aligned ourselves with other companies that aren’t part of Todd-AO or 4MC,” said Steve Weber, general manager of the Westside’s Crush Editorial and Voodoo Visual Effects (both of which focus on commercials). These arrangements “give us the same capabilities, in terms of service.”

Independents like Weber and Billy Pittard of Culver City post house Pittard Sullivan emphasize their “creative” approach. “We’re not selling facilities or service by the pound; we’re selling a customized end product,” Pittard said.

Still, both feel the pressure. Said Weber: “I really don’t want to see this become a battle between four huge companies. But it looks like that’s the way it’s going.”