German Film Firms Riding IPO Wave to Hollywood

Splendid Media’s subterranean offices at the end of a curved driveway evoke images of the basement start-ups of successful Internet firms in the United States, and similarities between this booming film distributor and software superstars are more than coincidental.

Splendid is one of dozens of German film companies to go public in recent months and ride the wave of capital into Hollywood, where the new financiers want their money to talk and filmmakers to listen.

Billions of dollars are flowing from newly flush German companies such as Splendid to established studios and undiscovered independents in the U.S., and those bankrolling projects in Hollywood are demanding in return a say in which scripts get chosen and which stars get the parts.

“This company made a quantum leap when we went public. We’ve become huge, and we can’t just leave this money in the bank. Investors expect us to use their money wisely so that it grows,” said Andreas Klein, Splendid’s 37-year-old director and chief stockholder, of the September floating of 25% of the company in an initial public offering on the Neuer Markt stock exchange.

Splendid, a family-owned firm for years that now has a market value of $275 million, bought a 49% share of Initial Entertainment Group in Los Angeles, with which it is financing six films a year to the tune of about $50 million. Among the projects are Robert Altman’s “Dr. T and the Women,” starring Richard Gere; “Under Suspicion,” a Stephen Hopkins film featuring Gene Hackman and Morgan Freeman; and “If These Walls Could Talk II,” directed by Anne Heche, with Sharon Stone and Vanessa Redgrave in lead roles.

“The competition in Germany has become enormous, which is why we wanted to acquire a stake in a U.S. company,” Klein said from the sleek interior of Splendid’s suburban headquarters, which, from the outside, resembles an underground parking garage. “This way we can have a say in the project before it gets off the ground.”

German entertainment firms have become flush with cash because of the success of Neuer Markt, a new stock index likened to Nasdaq that now trades more than 160 of Germany’s most dynamic companies, mostly in the telecommunications, media and high-technology fields. Nearly all the country’s big players in television, film production, licensing and distribution have had IPOs in the two years the index has existed, or are planning public offerings in the near future.

Werner Koenig of Helkon Productions sees the money pool generated by IPOs as the means to ensure that Hollywood produces movies that will be box-office hits in Europe as well as in U.S. theaters.

“Many filmmakers in America still think that because they were the center of the universe for such a long time that they don’t have to look at the European market,” said Koenig, whose Oct. 7 IPO sold off 40% of the company and gave it a market capitalization of $246 million.

A Global Player

That attitude is not just arrogant but short-sighted, Koenig said, because many Hollywood producers now rely on overseas revenue to recoup their investments. And Germany is the second-largest entertainment market in the world after the U.S.

“Hollywood is good at hiding the fact that it can’t finance its own productions anymore,” said Koenig, who attributes the recent Academy Award successes of independents to bureaucracy and risk-averse decision-making at the established studios.

“Studios are so afraid, so paralyzed, they don’t know the formula for a successful movie anymore. When you have 20 senior vice presidents who have to green-light a project, they agree on the lowest consensus of concept,” he said, contending that well-heeled outsiders are more willing to take chances.

Helkon is putting up 40% of the budget for a new film starring Leslie Nielsen, “2001, a Space Travesty,” and is weighing some full-financing deals that would give the company worldwide distribution rights, Koenig said.

German distributors were casting about for undiscovered Hollywood talent even before the run of IPOs, as their profits have long depended on choosing the right films and dubbing them for the German-speaking audience. Kinowelt, which provides more than 12% of the domestic cinema offerings, took a chance on little-known filmmakers five years ago and reaped major returns and renown for spotting the script-writing talent behind “The English Patient.”

Three stock offerings since Kinowelt’s IPO in May have infused the Munich licensing giant with $245 million, which Chief Executive Rainer Koelmel said is being invested in co-production, mostly with Miramax and New Line Cinema, in return for theater and television rights abroad.

“We know if we want to be successful in the theaters, we have to be involved in American cinema. It’s just a fact of life,” Koelmel said. “German films can be very successful at home, but if you want to be a global player you have to be involved in the American market.”

Rainer Binger of Cinerenta, another major German distributor, agreed. “English-language products have much better global position,” said the company’s general manager, who said an IPO is imaginable in the future, but that so far the private owners’ capital is sufficient to support the films for which it wants to acquire rights.

“It might be that we go to the stock market later, as this is developing very rapidly in Germany,” Binger said. “Other firms have had great success, but the brakes could be put on at some point.”

Eureka, the film production and distribution operation being developed under a joint venture by Kirch Media of Munich, Italy’s Fininvest and Saudi Prince Alwaleed bin Talal, plans to go public in 2002 but has been using investors’ money to get in on the movie-making. The company, formed in March after a $650-million cash infusion by the Italian and Saudi partners, has plans to back 20 to 25 Hollywood feature films a year for about $300 million to $350 million, said Eureka spokeswoman Michaela Niemayer.

Little of the money mounting in the accounts of German producers and distributors is making its way to domestic production, which is largely subsidized by public television revenue and state cultural stipends. German films seldom have much appeal in the crucial American market, with the odd exception such as Tom Tykwer’s “Run, Lola, Run” earlier this year and Wolfgang Petersen’s 1983 war classic “Das Boot.” In fact, German-produced films accounted for a pitiful 9.5% of cinema tickets sold in Germany last year, when only four national productions drew more than 1 million viewers each.

German Culture Minister Michael Naumann has called for “an alliance for film” to bolster the German industry and traveled to Hollywood in early October to lobby for wider distribution of German films in the U.S. While German producers and distributors lauded his intentions, they scoffed at the notion of politics influencing German films’ market appeal.

“He’s dreaming,” said Helkon’s Koenig. “Naturally, it’s his job to try to export our culture, but there is only one power in the world in filmmaking, and that is the United States. If you don’t shoot in English, it won’t be a success.”

Germany Benefits Too

The profit potential for German productions is minuscule, compared with the prospects for English-language films, said Ruediger Beres, co-director of Intertainment, another Munich-based company that went public in February.

“American movie content still represents 70% to 80% of entire revenues generated in the European market,” said Beres, whose company is involved in 60 Hollywood film projects.

Intertainment recently invested more than $700 million with Franchise Pictures and has acquired European distribution rights to all Warner Bros. films for the next five years and for 20th Century Fox output for the next decade. Those deals sent Intertainment’s stock price soaring from its debut at $33.65 to $168.22 in mid-October.

Although the IPOs have clearly benefited Hollywood filmmakers, the popularity of American films here indirectly subsidizes the German industry. More than 60% of the annual subsidies paid by the Federal Film Board to support domestic productions come from a 3% surcharge on all cinema ticket sales, for which Hollywood accounts for the lion’s share.