Tough time for Tinseltown IPO

December 11, 2009

The latest financial release from Hollywood looks like a dud. Two-year-old studio The Film Department is planning an initial public offering. But all it has to show for itself after two years of movie-making is one hit and $34 million of losses.

The founders launched The Film Department with Tinseltown-sized ambitions. Mark Gill, an indie studio veteran who worked on “March of the Penguins”, and “Crash”-linked Neil Sacker, had planned to release 30 films in their first five years. They’re off to a slow start.

“Law Abiding Citizen” has generated $72 million of ticket sales. But The Film Department still hasn’t paid off all the release expenses. And its second film, starring Catherine Zeta-Jones, doesn’t have distribution yet. That’s not promising given the company’s debt load.

The studio owes $62.3 million against $1.9 million of unspoken-for cash. Missed interest payments last summer put the firm in default, and attempts to raise new equity over the summer failed.

Lenders are granting some leniency on hopes of getting paid with IPO proceeds. A Yuletide debt payoff sounds like a Jimmy Stewart classic but not a compelling investment thesis. So Messrs Gill and Sacker have tried to spice up the offering by adding distribution to the mix. But that plan depends on raising more cash.

Retail investors shouldn’t get sucked in. The movie business is a notorious money pit, with high upfront costs and lumpy cash-flows. The studio will use about 40 percent of the $85 million it wants to raise to shrink debt. That’ll leave enough to finance just two more films, before it embarks on another $160 million of borrowing.

A writers’ strike and the credit crunch certainly couldn’t have helped the fledgling studio – but it still largely missed out on this year’s record domestic box office. With a weak track record, an unproven business model and no signs of a hit on the horizon, The Film Department still has much to prove.

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