Hollywood and Film Financiers: A Torrid Love Affair Hits a Rocky Road

Amid box-office uncertainty, the outside money propping up studios becomes a question mark as Texas-based LStar Capital bails on Sony, Village Roadshow suffers several misfires and Paramount's China backer is under pressure.

At the stroke of midnight on July 18, the slate financing deal between Sony Pictures and LStar Capital came to an unceremonious and premature end when LStar didn't send in the money covering its 25 percent investment, amounting to $12.5 million, in The Emoji Movie, which opens July 28.

It was just the latest crack-up in the ongoing, and often contentious, relationship between outside money and Hollywood. All the major studios — except for Disney — rely on third-party money to partially bankroll many of their movies, especially big-budget projects. But as the box office serves up an increasing number of misses, some key investors are retreating altogether, like LStar, or finding themselves in financial straits, as is the case with Village Roadshow Pictures. China is an expanding source of financing, but as the Chinese government puts a hold on money leaving the country, studios — like Paramount, which has been counting on a $1 billion slate deal — could be left in the lurch.

And then there are the cases of high-net-worth individuals who leave Hollywood for other pursuits: Treasury Secretary Steven Mnuchin has just divested his stake in Warner Bros. partner RatPac-Dune Entertainment, which has invested in movies like Wonder Woman and the upcoming Justice League. His departure followed that of Australian billionaire James Packer, who founded RatPac with director Brett Ratner in 2012. But just as some money exits, new money flows in. Packer sold his stake to billionaire Len Blavatnik, who also bought out Mnuchin's shares, according to sources (a rep for Blavatnik says that neither he nor any of his companies bought out Mnuchin's stake). Financial terms of the sale of Mnuchin's stake were not disclosed, but a knowledgeable source pegged the price tag at $25 million, representing a slight loss for the treasury secretary.

At Sony, the relationship between LStar, backed by Texas-based private equity firm Lone Star, and Sony Motion Picture Group chairman Tom Rothman had long been on the rocks. The $200 million deal, under which LStar agreed to pony up 25 percent of the budget on Sony movies, was originally struck in 2012, when Rothman's predecessor Amy Pascal was running the studio. But after weathering losses on movies like Aloha and The Brothers Grimsby, LStar pulled out of Ghostbusters at the 11th hour. The decision turned out to be the right one for LStar though it angered Rothman: Ghostbusters would go on to lose tens of millions of dollars for Sony and Village Roadshow, which also had an investment in the film.

Rothman was not unhappy to part ways with LStar, whose deal, which sources say was to have run through 2019, he considered unfavorable to the studio. But so far, there's no word of a new slate financing partner. A number of hedge funds and private equity firms are interested in a potential co-financing deal, including the Carlyle Group and China's Starlight Media, according to a knowledgeable source. Sony also has lined up partners on individual films — Cross Creek on the upcoming Flatliners and Walden Media on The Star.

Hollywood has a long history of attracting new investors, only to see them look for the door when they become disillusioned. The allure of the bright lights fades as the reality of how tough the film business can be sets in. Blavatnik, for example, has approached investing in the film business cautiously after his experience with The Weinstein Co. In 2010, it was announced that he was investing in a three-year film fund set up by TWC, but it never came to fruition (in 2011, Blavatnik launched AI Films, which put money into such films as The Butler, Silence and the upcoming Margot Robbie starrer I, Tonya).

"Len loves all the accoutrements that come with Hollywood, but he doesn't want to lose money," says a producer who has worked with Blavatnik in the past. "He is actually quite conservative when it comes to spending money."

He's entering the studio slate financing business at a precarious time. Many Hollywood studios, including Warner Bros. and Sony, have been rocked by bad runs at the box office, especially when it comes to sequels (Warners' The Lego Batman Movie, of which RatPac-Dune had a piece, earned $158 million less this summer than its predecessor, The Lego Movie).

"The film business has become much more volatile and much more unpredictable," says leading film finance attorney P. John Burke of Akin Gump Strauss Hauer & Feld. "It's more important than ever for studios to find financiers willing to invest in films, but at the same time it is more difficult than ever for financiers to invest on historical terms because film performance is more volatile. In order to get deals done, the studios need to be willing to align their interests more closely with the interests of the investors."

At one point last year, LStar and Sony talked about revising the terms of their deal, but the talks came to an abrupt halt when it was suggested that LStar might be excluded from participating in the studio's animated films. (Hotel Transylvania 2 was a huge win for LStar.) In the end, LStar lost money on the vast majority of the 30 films it helped pay for, including Passengers, which Village Roadshow also had a stake in.

Village Roadshow Entertainment Group, which has been co-financing Hollywood movies for two decades, primarily at Warner Bros., has suffered a series of duds to the point where it recently took on new majority owners: hedge fund Vine Alternative Investments and Falcon Advisors. Village Roadshow's financial woes reached a crescendo in 2015, when Vine and Falcon led a $325 million recapitalization of VREG alongside Australian parent company Village Roadshow Limited.

When VREG was unable to meet its financial obligations, Vine and Falcon converted some of the debt to equity and became majority owners. Village Roadshow Limited remains a significant shareholder.

This summer has been tough on Village Roadshow. Two films from Warners that it co-financed, King Arthur: The Legend of the Sword and The House, both bombed. King Arthur stands to lose as much as $150 million for the studio along with Village Roadshow and RatPac-Dune after topping out at $140 million at the worldwide box office.

"All of this indicates how difficult it is to second-guess a studio when it comes to picking which movies to co-finance," says another film finance expert.

In a statement to THR, Vine CEO Jim Moore — who does double duty as VREG chairman alongside longtime VREG CEO Greg Basser — says the new partners are fully committed to keeping Village Roadshow intact. "Village Roadshow is an investment we strongly believe in," he says. Vine isn't an entertainment newbie, with investments in film outfits including Alcon Entertainment and EuropaCorp. Moore works closely with Basser and Bruce Berman, who remains chairman and CEO of Village Roadshow Pictures.

The next year to 18 months will be key for Village Roadshow, sources say. Upcoming Warner Bros./Village Roadshow films include Steven Spielberg's Ready Player One (March 20); the female-centric Ocean's Eight (June 8), starring Sandra Bullock, Cate Blanchett, Anne Hathaway, Rihanna and Helena Bonham Carter; and Clint Eastwood's next film, the terrorist drama The 15:17 to Paris, which doesn't yet have a release date.

While Village Roadshow doesn't have a traditional slate arrangement with Warners, but rather chooses films on a one-off basis, as RatPac does. But as is typical with slate financing deals, Warner Bros. often keeps its safest bets off the table. RatPac was not invited to participate in last year's Warners hit Fantastic Beasts and Where to Find Them, which earned $814 million worldwide.

"Slate deals are a good way to spread the risk around," says Wall Street analyst Eric Handler of MKM Partners. "But rarely has the performance of these funds over the past 10 years been profitable. Some call it dumb money. You saw Wall Street funds, Japan money, German funds and then China, where there's now a crackdown."

Given the latest developments in China, the fate of a potentially rich slate financing deal between Paramount Pictures, now under the leadership of new studio chairman Jim Gianopulos, and Chinese film company Huahua Media remains a serious question mark. Gianopulos flew to China several months ago to revive the pact, but now a majority stake of Huahua has been sold to another Chinese firm.

The sale renews doubts about whether Paramount will ever see the full $1 billion in Chinese financing it was promised from HuaHua and Shanghai Film Group.

Paramount isn't without partners. David Ellison's Skydance Media continues to team with the studio on such big-budget films as Star Trek Beyond and the upcoming Mission: Impossible outing. Unlike many of the other check-writers, Ellison insists on having creative input on the films he co-finances.

Though the 2017 box office may be rocky, studios ultimately are looking for stability when it comes to financiers. 20th Century Fox appears to have found that with its ongoing slate deal with Chip Seelig's hedge fund TSG Entertainment.

And Universal had hoped it was on solid footing with its co-financing partner, Legendary, although there are now questions about whether Legendary's parent company, Wang Jianlin's Dalian Wanda Group, is under pressure from the government that would prevent it from making overseas investments. Legendary, whose upcoming slate includes Universal's Pacific Rim: Uprising, insists it is currently well capitalized to fund its film and TV slate. Of course, as with any slate financier, a few big hits would certainly help.