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Media, Sport and Entertainment: A flair for film

Author: Nick Owers

Published: 18/10/2007 00:55

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Where were you on the weekend of 27-29 July this year? There is a good chance you were in the cinema (5.5 million people in the UK were) and the UK can boast record cinema admissions this summer. UK film talent, both in front of and behind the camera, remains high- profile and will doubtless be in the headlines this month on the occasion of the 51st London Film Festival. You could be forgiven, then, for assuming that the star of the UK film business shines as brightly as ever.

In fact, the UK film business needs to justify every element of its name now more than ever before. To what extent is it a UK-centric business and to what extent can it remain one? How will it manage the challenges that digital technology is levelling at the analogue format of film? Above all, can it properly call itself a business and how can it persuade new sources of finance that it is? Lawyers working with clients in this industry need a broader range of skills and expertise than ever before in order to advise their clients effectively.

Consider the impact of digital technology; it has facilitated piracy (estimated to have cost the UK film and television industry almost £500m last year). It has also created new forms of entertainment, on the internet in particular, which have put pressure on traditional film viewing.

The more entrepreneurial elements of the industry are embracing the opportunities of digital technology, however, at every level of production, from the price of film stock and camera hire to the editing process, digital technology is delivering cost savings. So too in film distribution, digital technology is driving down ‘print’ replication and delivery costs and enabling online video services to offer consumers a greater choice of films than ever before. Digital technology has also helped film marketing strategies evolve and become more targeted: some producers are using secure technology to make test screenings of their films available over the internet which can inform their edit process, help them understand their audience better and build online communities around productions.

What digital technology has not yet done, however, is make independent UK films any easier to finance. The financing of films in the UK has gone in cycles: 15 years ago many films could be financed purely from pre-sales (selling distribution rights to distributors around the world); 10 years ago the rise of tax-advantaged investments plugged the gap caused by the collapse in the pre-sale markets and tax fund facilitators became a driving force behind UK film financing; now the UK tax funds have gone and the Government’s film tax credit, although very welcome, has not replaced that economic loss, so the industry is looking for the next play. Unfortunately, the availability of new exploitation platforms has not yet driven up the advance price that companies are prepared to pay for rights in films. Instead, companies acquiring internet or video-on-demand rights, for example, are often only taking these rights non-exclusively and on a revenue-share basis, and collateralisation values for films continue to fall.

The stated ambition of the Government and many of those involved in film in this country is the establishment of a sustainable industry. The reality is that many producers are insufficiently capitalised and still live precariously from one project to the next. The vision for many of these companies must be to seek proper long-term corporate investment to allow them to put in place and execute the long-term business plans that are crucial to turnover an output of productions worthy of the description ‘industry’.

To stay in business, producers will need to become ever more business-like themselves and seek new sources of finance, including corporate finance. Film has always had a creative appeal — relatively intangible elements like a script, cast and crew can often combine to create something unexpectedly special on the screen. Unfortunately they are generally financed in advance and, without the backing of a careful business plan, such unpredictability will hold little investment attraction for a corporate financier concerned by risk and return.

There are signs that film is regaining its attractiveness as an asset class to corporate finance, however, and UK producers may be able to capitalise on this. Hedge funds and private equity houses have invested significantly in film production over the last year at both US studio level — for example the $300m (£148m) hedge fund raised by Dresdner Kleinwort to invest in Paramount’s 2007 slate of films — and the prominent independent producer level — such as the $240m (£118m) private equity investment in Joel Silver’s Dark Castle Productions underwritten by CIT Group.

These sources of finance still need investment opportunities for their reserves of cash (despite the recent credit crunch) and, with the obvious US options dwindling, production and distribution operations elsewhere, including Europe, are being considered. Goldman Sachs, for example, has bought into the distribution capabilities of Alliance Films in Canada, Momentum Pictures in the UK and Aurum Producciones in Spain.

A major challenge for UK film companies is persuading such financiers that they operate at a scale that is appealing to investors — shares of a market which only spent £842m in total on production last year are not an immediately attractive investment proposition for major corporate financiers. This suggests that UK film businesses cannot afford to remain too UK-centric and should think big.

Here, a comparison with the television industry is instructive. Once upon a time, the independent television sector could claim few really profitable businesses, but a raft of ‘super-indies’ with turnovers in excess of £100m has now emerged. Television companies have been entrepreneurial in their approach to finance. Companies such as RDF and Shed have accessed the capital markets by listing on the Alternative Investment Market. Some, such as Shine, have grown by acquisition of prominent producers like Kudos. Others have dramatically scaled up through ambitious use of corporate finance: Amaze TV, which joined forces with European producer D&D Media Group this month to form a global television company backed by a reported £185m of private equity funding from UK-based Palamon Capital Partners, is only the most recent example.

The UK film business has similar success stories of course. Working Title and DNA Films, for example, have achieved a significant turnover of production in recent years through close working and corporate relationships with US studios, which not only help fund their slate but also distribute it. Producers with successful television businesses are finding that they have sufficient resources to develop films: Celador Productions, which produced the acclaimed ‘Dirty Pretty Things’ for the big screen (as well as ‘Who Wants to be a Millionaire’ for the little screen), is one example.

This is not to say that all British film businesses have to scale up, rather to emphasise that only the particularly entrepreneurial operations will flourish sufficiently to provide the consistent basis of financial support that our creative talent needs. The recently-formed Slingshot is one UK company which aspires, in many ways, to scale down rather than up. It intends to produce 10 ultra-low budget films over the next three years by embracing digital production methodologies, using deal structures which minimise upfront costs, committing to produce a slate of films to maximise economies of scale, reducing risk by focusing on projects with commercial appeal and striking up strategic partnerships to self-distribute wherever possible. It is a good example of a company that recognises the importance of a coherent business plan and securing sufficient funding to sustain production and distribution of a slate of films, no matter how small the budget levels.

In five years’ time the traditional asset financing models of film may have all but disappeared as collateralisation values remain insufficient. The winners in this market will be the companies that recognise that they need a new way of accessing the immense value that many films can enjoy nonetheless and plan accordingly. n

Nick Owers is an associate in the film and television group at Olswang.

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