For Panavision, a Blurry Picture

Billionaire dealmaker Ronald O. Perelman hit one of his first home runs by buying and later selling Technicolor Inc., the venerable movie film processor, for a fat profit in the 1980s. He pulled off a similar feat a decade later with the television-production firm New World Communications Group.

Now Perelman is trying to score again in Hollywood with Panavision Inc., the dominant provider of cameras for shooting movies and TV shows. But nearly five years after he took control of the Woodland Hills-based company, Perelman is still waiting for the payoff -- if one ever comes.

Panavision is in financial trouble because it’s buried under a huge mound of debt. The company’s shaky condition largely was created by Perelman, who borrowed most of the cash to acquire his con

trolling interest in

Panavision in a

complex $680-mil-

lion transaction.

Yet the ques-

tion of Panavi-

sion’s future is of

interest to more

than just Perel-

man and his

bankers. Al-

though it’s a

relatively small

company, with

about 1,000 employees and 2001 revenue of $191 million, Panavision’s role in Hollywood is so far-reaching that its financial health is of vital concern to the major film studios, movie directors and the television industry.

Inside and outside the company, the question is the same: Given the state of its balance sheet, will Panavision have the wherewithal to continue as the industry’s dominant player, especially as Hollywood moves from film to digital production?

“I would be very sad if the company wasn’t able to hang in there, but they’re certainly making every effort,” said Wally Pfister, a cinematographer whose credits include “Memento” and “Insomnia.” “Their service is fantastic -- they’ve always been able to give me what I need.”

As with most such “leveraged buyouts,” Perelman was betting that Panavision would keep generating enough cash flow not only to handle that debt but also to enhance the value of the company so that the 60-year-old New Yorker could later sell out for yet another profit.

But the debt -- a combination of bank financing and junk bonds -- has so far strangled Panavision.

Although demand for its products remains strong, the company hasn’t made money for years -- it has a cumulative net loss of $118 million since 1998 -- because its earnings get wiped out by interest payments on the debt.

“Was there too much leverage on this company? No question about it,” said Howard Gittis, a longtime Perelman lieutenant and vice chairman of MacAndrews & Forbes Holdings Inc., Perelman’s main investment firm.

But efforts are underway to reduce Panavision’s debt, Gittis hastened to add, to bolster the company’s prospects so that Perelman one day might be able to reap a reward on his investment.

Panavision -- a small part of Perelman’s empire, which includes cosmetics giant Revlon Inc. -- unquestionably is a unique property.

At its 150,000-square-foot headquarters, a skilled workforce designs and builds all of the equipment. Nearly 80% of film directors and TV producers call up Panavision to obtain cameras and lighting equipment before they start shooting. (The company rents its wares instead of selling them.) “Titanic,” “Harry Potter and the Sorcerer’s Stone” and “The Matrix” are just three of the blockbuster titles that were shot with Panavision gear, as was every James Bond movie.

Renowned for Service

One of the reasons for Panavision’s popularity is the company’s renown for its global, 24-hour service. Directors shooting on locations from Malibu to Morocco can get immediate technical help. “There is always a lot that can go wrong out there in the muddy field,” said Will Paice, Panavision’s chief operating officer.

There’s a lot that can go -- and has gone -- wrong in the executive suite, as well. This month, Panavision’s president and chief executive, John Farrand, resigned when his contract wasn’t renewed. The company, Gittis said, “has to be managed more aggressively.”

This is particularly true as the entertainment industry shifts from its long reliance on film to digital production. TV already has moved rapidly toward high-definition and other digital equipment. While there is sharp debate as to how fast movies will make the migration, there is no doubt that moviemaking will further incorporate digital technology.

Panavision has a high-definition joint venture with Sony Corp., and its system was used in the first major digital feature film, George Lucas’ “Star Wars: Episode II Attack of the Clones.” Panavision also owns Efilm, a provider of digital post-production services for Hollywood. Still, Gittis said, “we were slow in rolling out” such initiatives.

And rivals are eager to chip away at Panavision’s digital efforts. Dalsa Corp. of Canada, for instance, plans to roll out its first digital movie camera this spring, and it’s lining up partners to provide 24-hour technical support to compete head-on with Panavision. “We believe we’re bringing something substantial and fresh to the marketplace,” said Dave Litwiller, Dalsa’s head of business development.

Steven Poster, president of the American Society of Cinematographers, said he expected Panavision to stay in step with the industry’s changes. “We’re going to see a new commitment from Perelman to make this company fiscally healthy again,” along with a “new commitment to research and development on all fronts,” Poster predicted.

Panavision was founded in 1954 by camera technician Robert Gottschalk. The company grew rapidly after it developed a standardized line of equipment so that cinematographers didn’t have to mix and match various cameras and lenses. Another landmark came in 1972, when Panavision built the lightweight Panaflex camera that enabled moviemakers to film in tighter situations, often with the camera being held by hand.

The typical rental period for a feature film is 10 to 12 weeks, but TV shows and commercials may use Panavision’s cameras for only a few days.

Its rental prices vary widely, depending on how many cameras are used and for how long. But Panavision says the average rental cost is less than 1% of a feature film’s budget, so a $100-million movie would include less than $1 million for cameras.

Gyrating Revenue

In recent years, Panavision’s sales have failed to grow at a steady clip and instead have gyrated in tandem with the annual ups and downs of movie production. When he bought Panavision, Perelman “expected much higher revenues than they ever accomplished,” said Christina Padgett, a credit analyst at Moody’s Investors Service, which rates the company’s debt as speculative.

Her conclusion: “He overpaid.”

Padgett and others are concerned that if Panavision stays financially weak, it won’t have the cash to keep developing the products that filmmakers will demand.

Panavision’s losses also could mean cost-cutting that would erode the company’s service, industry observers said.

“Then they won’t have the market position that they now have,” Padgett added.

But Gittis scoffed at those suggestions. The company “can spend on R&D; [research and development] whatever they want to spend,” he said. “We never once cut an R&D; budget at this place.”

Panavision had planned to sell about $200 million in bonds last year to refinance its heavy debt load, but the sale went nowhere because of a legal fight between Perelman and some dissident investors.

The dispute surfaced after Perelman, who also is chairman of Panavision, proposed having one of the other companies he controls, M&F; Worldwide Inc., buy his 83% stake in Panavision for an above-market price.

That angered other M&F; shareholders, who alleged that the move was designed to enrich Perelman while diluting the value of their shares.

The dissidents sued, and Perelman finally settled the matter in December by unwinding the transaction. Since then, he has been swapping some of the high-yield Panavision debt that he holds for more stock to reduce Panavision’s debt load, according to Gittis.

By next month, Panavision’s total debt will drop to about $330 million from more than $470 million after Perelman purchased Panavision. At the same time, Gittis said, Perelman will own about 91% of Panavision stock.

Perelman’s dominant control has always meant that Panavision shares are thinly traded. The company’s stock traded last week at $3.90 a share on the OTC Bulletin Board.

Will Perelman eventually buy those remaining shares and take Panavision private? Gittis declined to comment on that possibility. But he said Perelman has no interest in selling Panavision, either.

Indeed, Perelman, who is on his fourth marriage and has six children, always has enjoyed being part of New York and Hollywood society, and Panavision is one way he gets to rub shoulders with entertainment elites. His record also indicates he’ll be patient for Panavision to ultimately add to his net worth of $2.6 billion, as estimated by Forbes magazine.

“We like companies that are market leaders, in solid, stable businesses ... with world-class reputations,” Gittis said. “We’ll make a lot of money on this deal, I have no doubt about it.”