UPDATE: Fox’s Film Financing: Troubled Or Not?

WRITETHRU WITH NEW INFO: Paramount is flatly denying any financing crisis detailed in tomorrow‘s Financial Times newspaper. My insiders at the studio are confirming that, yes, Paramount and Deutsche Bank did not make an overall deal for hundreds of millions of dollars as planned to underwrite future movies. But the studio maintains that it walked away from the final negotiation two weeks ago because the terms weren’t acceptable and that, soon after, Deutsche Bank’s film financing arm shuttered. So I’ve got to ask: how much of this is fallout from the current credit crunch, and how much is fallout from the nearly certain loss of DreamWorks by the end of this year? And is this financing critical to the continued smooth operation of the studio and its movie projects?

is insisting that nothing will change about the way it’s doing business because the Deutsch Bank deal went south. “Viacom is zero upset about this,” one source at the studio assures me, “It’s much ado about nothing. All I know is that we’re covered.” That’s because Paramount says individual partners like Spyglass, Level 1, Village Roadshow, and a small reincarnation of its former overall deal, Melrose II, as well as rival studios through co-productions are all helping finance its upcoming slate of films on a one-by-one basis.  And the studio says it will continue doing that — financing each pic with an outside partner or as a co-production — until the current credit crunch eases. “We like those deals and economics much better. They’re far stronger for us,” an insider at the studio assures me. “We’re very comfortable as is Viacom with our business plan. We’ve now laid off as much risk as we need to.”

Paramount insiders even tell me that, for now and the immediate future, it will suspend looking for an overall financial partner until the credit crunch is over.

Here’s what happened, according to my sources: Paramount’s COO Frederick Huntsberry, CFO Mark Badagliacca, and SVP of capital management Mark Pinkerton had been negotiating for some time with Deutsche Bank’s film financing arm, newly headed by top media and entertainment bank Laura Fazio who’d been hired away from Dresder Kleinwort a year ago to jumpstart what was considered a lagging division. What was being discussed was an overall deal for 30 films that only financed 25% of each movie and capped at $30M. It was, in the words of one Paramount exec to me, “Just a drop in the bucket.” Also contributing equity and a portion of the mezzazine financing to the Deutsche Bank deal with Paramount was Qualia Capital, the bicoastal media and entertainment investment fund.)

Then, about a month ago, the trio came to Paramount bosses with a status report on the deal. And Brad Grey et al didn’t like it. “It was not strong enough. It gave too much money away if the pics do well and not offset enough of the risk if the pics don’t,” an insider told me. “So we notified them two weeks ago that the deal didn’t make any economic sense and there was no point to this. What we decided was to walk away. And having lost this piece of business, they shut the division down.”

My sources stress that any characterization that the studio “lost” the financing is untrue. Which is why the studio finds the Financial Times story tomorrow misleading. But an outside-the-studio source told me over the weekend that the reason why no financial group is helping Paramount isn’t just the credit crunch — but also because the studio hasn’t built up a good enough movie track record of its own. The Hollywood veteran told me: “Paramount doesn’t have an equity financing deal because it lost the one it was making and has not been able to replace it because the studio’s record is so bad.” After all, if it hadn’t been for DreamWorks, DreamWorks Animation, and now Marvel, and also Steven Spielberg, the Paramount balance sheet over the past 2 1/2 years would be a total disaster area. That is what the Financial Times report certainly hints at when it says:

“The credit crunch has hit home in Hollywood after Paramount Pictures, which has released a string of hit movies this year, was forced to suspend plans for a $450M film financing. The studio has been working with Deutsche Bank on financing that would have provided funds for up to 30 films, including possible blockbusters such as the sequel to Transformers and a new version of Star Trek. However, Deutsche has decided to close its film finance unit and concentrate on other areas. With the Paramount deal proving difficult to close because of a market-wide lack of enthusiasm for the senior debt component of the deal, the financing has effectively been left in limbo.”

I first heard over the weekend this rumor that Paramount was having “financing problems” and that, specifically, it had “lost” its financing. Under normal circumstances, Paramount would have been able to replace Deutsche Bank with another source of financing fairly easily. But Deutsche Bank is only the latest financier to stop underwriting movies and close its film division. (Duetsche Bank let go Laura Fazio, plus others, after making a big fuss out of hiring her a year ago.) So there are less places for the studio to go, especially because of the current credit crunch. These financing deals are crucial not for a studio to survive but so a studio can mitigate its risk. That’s why Fox has its Dune deal, Warner Bros has Legendary, Disney has Kingdom, both Sony and Universal have Relativity, United Artists supposedly has Merrill Lynch funding, and MGM is still looking for its financial partner.

Here are the deals that Paramount currently has in place: Level 1 is helping underwrite Star Trek, Spyglass is aiding G.I. Joe, Transformers II‘s deal is Melrose 2 (which financed the original pic and was given another crack at the sequel), and The Curious Case Of Benjamin Button is a co-production with Warner Bros. “So on all of our biggest movies over the next year we already had a partner,” a Paramount insider tells me.

Of course, the timing of the Financial Times story is uncomfortable for Paramount because the studio bosses are winging to NYC on Thursday for an LRP — long range planning — meeting with parent company Viacom where the studio will present its slate of pics through 2012. But, again, the studio is shaking off the headlines. As one insider put it to me, “Paramount has been around for 100 years. And it will be around for a very long time.”

Sure, the studio has boasted about making $2 billion at the box office worldwide already in 2008. But the breakdown shows that the studio itself isn’t necessarily responsible for that. Yet that’s exactly why DreamWorks was purchased at the end of 2005 — to get Paramount over the worst of its dry spell. And then DreamWorks proceeded to put Paramount at the top of studio box office share in 2006 and 2007 with a string of hits like Disturbia, Transformers, Norbit, etc.

So did DreamWorks Animation, which Paramount is distributing until 2010 and whose Kung Fu Panda is keeping Paramount competitive this summer even though the studio receives only distribution fees. Same story with Marvel’s Iron Man, which gives Paramount box office boasting rights this summer but again only distribution fees. Even Paramount’s fourth in the series, Indiana Jones And The Kingdom Of The Crystal Skull, comes with an asterisk because it’s unclear how much worldwide gross the studio gets to keep after Steven Spielberg and George Lucas receive their massive payouts.

This reality is one reason why DreamWorks took out that clever but also churlish ad in Variety last Thursday congratulating Paramount’s marketing and distribution for $1.6 billion in box office so far this year for Iron Man, Kung Fu Panda, and Indiana Jones 4. The point was to underscore that, without DreamWorks Animation, and Marvel, and Spielberg, Paramount’s take would have been slim pickin’s. And DreamWorks will be leaving soon, with David Geffen and Steven Spielberg out the door as well. DreamWorks Animation will be able to follow a year and a half later.

Of course DreamWorks will be leaving behind such franchises as Transformers, with the sequel just around the corner. But as I’ve reported, Paramount and DreamWorks don’t see eye to eye when it comes to unravelling the two companies, especially what monies Spielberg can pocket according to the terms of his employment deal. Expect a battle royal.

All of the above may explain why there’s uncertainty in the financial markets even beyond the current credit crunch about Paramount right now. But none of that takes into account the real likelihood that the studio has a profitable outlook on the horizon. In addition to Transformers, the studio can restart the Star Trek franchise under J.J. Abrams as well as begin a new franchise with G.I. Joe. All could be blockbusters. Or not. A the FT concluded: “But if the studio fails to revive the deal with another bank it could force Paramount to seek funds from Viacom, the media conglomerate that owns the studio, to produce the titles. This would expose the company to greater financial risk if the films fail to perform as expected.”

Editor-in-Chief Nikki Finke - tip her here.

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