German Money Makes Its Mark on Hollywood

With some traditional financing sources drying up, producers of big-budget Hollywood independent films are crossing their fingers that a buying boom by German companies won’t fizzle any time soon.

Fueled by sky-high valuations for entertainment stocks at home, German companies now contribute up to 15% of the financing for bigger-budget Hollywood independent films--about double their support levels of five years ago, according to Kathy Morgan, head of the Los Angeles-based American Film Market Assn., a group of independent film distributors.

“In some cases today, German buyers are putting up 50%” to secure all European rights, said Morgan, who owns an international film sales company. “They have a lot of power in determining what movies get made.”

Skeptics worry that these companies may have trouble making good on their aggressive investments. Signs of this reckoning may be starting to emerge even as the stamina of these German backers is tested again this week.

The annual American Film Market, one of the independent film sector’s biggest trade events, kicked off in Santa Monica on Wednesday--with the expectation that German money would again brighten an otherwise lackluster international climate.

After a decade of healthy growth, the Asia-Pacific and Latin American territories have retrenched over the last 2 1/2 years amid economic turmoil. For example, South Korea, a voracious buyer accounting for 5% of an average independent film’s budget by the mid-1990s, now supplies only 2% to 3% coverage.

Even Italy, once a major buyer, has scaled back as industry leader Cecchi Gori Group, originator of the Miramax-distributed Oscar winner “Life Is Beautiful,” experiences a financial crisis stemming from its unsuccessful diversification into Italian TV broadcasting.

Typically, Hollywood’s independent filmmakers finance projects costing $25 million or more by selling distribution rights country-by-country before production. They use these “pre-sale” contracts as collateral to secure bank loans. The U.S. typically accounts for the biggest slice, covering 20% to 35% of a film’s budget, with other big spenders such as Japan, Italy, Britain and Australia/New Zealand typically coming in for 10% or less.

For Germans, the buying binge is a result of a stock frenzy in which 15 medium and small German movie companies have raised $1.13 billion through initial public offerings over the last 2 1/2 years. Thirteen of these companies are listed on the Neuer Markt (New Market) in Frankfurt, which is similar to Nasdaq in the U.S. and where valuations are as frothy as any in the U.S. Internet sector.

For instance, EM.TV & Merchandising, a TV and film company, is now worth $10.8 billion, up from $35 million when it went public in October 1997. The company has used its stock for a series of acquisitions, including a deal announced this week to buy Los Angeles-based Jim Henson Co., whose properties include the Muppets, for about $680 million.

A patchwork of foreign buyers reportedly contributed $65 million toward the estimated $90-million budget for Martin Scorsese’s “The Gangs of New York.” The movie’s foreign sales were handled by Beverly Hills-based Initial Entertainment Group, which is 49% owned by Splendid Group, one of the 15 newly public German companies.

“The risk for Hollywood is that we come to rely on these higher price levels that are not based on intrinsic values within the territory,” says Peter Elson, president of Los Angeles-based film seller Global Cinema Group.

While the German money machine is not forecast to go bust any time soon, skeptics doubt that the current spending levels can be sustained.

For one thing, analysts say, the German firms won’t be able to squeeze any more money for films out of that country’s broadcasters and pay-TV outlets, which have signaled they will hold the line on payment for film rights.

The German players themselves increasingly buy rights for multiple European territories, rather than just Germany, increasing their risks as they become a one-stop shop for Hollywood independents.

“Eventually, there will be a day of reckoning, depending on exactly how these movies perform,” noted Michael Mendelsohn, president of Los Angeles film outfit Patriot Advisors, who is a consultant to German buyer CineMedia.

Robert Marich is editor of Variety Deal Memo, a newsletter covering the international film business.