Slate Co-Financing: Mitigating Risk and Generating Long-Term Returns
Hollywood studio slate co-financing is a capital-intensive endeavor, with annual production costs exceeding $1 billion for every major film studio. Despite the improved film economics that streaming has created since the COVID-19 pandemic, studios still require capital to fund their expensive film slates, making co-financing partners an attractive proposition. Slate co-financing is imperative for movie studios as it reduces financial risks, provides greater flexibility, and facilitates additional access to capital. The growth of streaming has also increased the need for more premium content and capital, resulting in higher demand for co-financing partners. As the film industry evolves, slate co-financing is expected to become an even more critical part of the financial landscape for movie studios.
Why Slate Co-Financing Matters
Slate co-financing offers a significant advantage by mitigating the financial risks linked to movie production. As film studios ramp up their production expenditures, they often seek external financial backing to ensure stability, even if it means sacrificing potential profits. With slate co-financing, studios gain access to alternative sources of capital beyond traditional debt, enabling them to decrease their debt burden and improve their overall financial position. Through a slate co-financing deal, a studio will gain an equity partner willing to share the risk, with the tradeoff that the profit is shared proportionally. This becomes particularly crucial in challenging economic climates where effective debt management is vital. By combining multiple films into an organized slate, studios can provide investors with a diversified portfolio of movies, which proves far more enticing than financing a single film.
Historically, Hollywood’s capital sources have come in waves, causing moments of financial distress for the studios as it ebbs and flows. In the 1990s, there was a surplus of German financing in Hollywood, as investors could deduct 100% of their initial investment against income, making film investments an attractive option for many private investors. In 2003, before the change to the tax law, German investors committed approximately €1.4 billion annually to U.S. film and television assets, accounting for 15% of Hollywood funding. However, the German government later eliminated the tax breaks, reducing the incentive to invest in media assets. As a result, Hollywood experienced a significant decrease in capital from Germany, leading to an industry-wide funding void.
Similarly, in 2012, approximately $2.7 billion of Chinese investment flowed into the U.S. media and entertainment sector, accounting for 37% of China’s total foreign direct investment in the U.S. that year. The peak of Chinese investment occurred in 2016, with Chinese companies investing around $4.8 billion in U.S. media and entertainment companies. However, the influx of capital slowed as Chinese regulators observed capital outflows and implemented new regulations on foreign investment in 2017. Suddenly, a funding void emerged, and the billions of dollars that previously funded Hollywood movies were gone.
Studios have found that partnering with film finance companies backed by reputable blue-chip investors has historically been the most dependable and favorable option. The studios prefer slate co-financing deals with specialty financiers and institutional investors over riskier international sources. This strategy has contributed to the growth and success of companies such as Village Roadshow Pictures, Legendary Entertainment, Relativity Media, Dune/RatPac-Dune Entertainment, and Skydance Media.
A Brief History of Slate Co-Financing
Village Roadshow Pictures
One of the most successful slate co-financing transactions was established between Warner Bros. and Village Roadshow Pictures. The partnership began in 1997 with an initial agreement for 20 movies over five years, with Village Roadshow financing between 25% and 50% of each film. The relationship was so successful that it lasted longer than five years and continued to grow annually. In 2005, Norman Lear, Hal Gaba, and Michael Lambert led a consortium that acquired a 50% interest in Village Roadshow, bringing in additional financing to establish growth. They quickly doubled the filmmaking capacity from four to eight pictures per year. In 2012, Village Roadshow obtained $1.125 billion in equity and debt financing to further expand its financing capabilities, which created funding for Warner Bros. movies until 2022. From the first deal in 1997 to 2022, Village Roadshow co-financed over 100 films for Warner Bros., including franchises like The Matrix franchise and the Ocean’s franchise, as well as blockbuster hits like “I Am Legend” and “Joker”.
Village Roadshow expanded its financing beyond Warner Bros. and actively provided capital to other studios. In addition to co-financing individual movies with 20th Century Fox, Disney, Paramount, and Universal, Village Roadshow embarked on a second film slate co-financing partnership with Sony in 2014. This collaboration with Sony lasted until 2016, during which Village Roadshow financed eight movies.
Legendary Entertainment
Another significant co-financing partner for Warner Bros. was Thomas Tull’s Legendary Entertainment. In 2005, Legendary made a $500 million investment to co-finance a slate of films in a joint production agreement with Warner Bros. The initial deal was structured for 25 films, with both parties sharing a 50/50 financing arrangement. Unique to this deal, Legendary also initially co-financed print and advertising (P&A) costs, which helped ensure alignment of interests and that each film received an optimal marketing budget. Warner Bros. and Legendary extended the deal in 2007, with Legendary providing $1 billion in additional investment to co-finance up to 45 films over the next five years. From 2005 to 2013, Legendary funded many blockbuster movies and franchises, including the Christopher Nolan Batman Trilogy and The Hangover Trilogy.
When Legendary’s agreement with Warner Bros. expired in 2013, they entered into a new five-year co-financing agreement with Universal. The financial specifics of the deal were not made public, but it allowed Legendary to co-finance 17 movies during the five-year period, most notably “Jurassic World” and “Jurassic World: Fallen Kingdom”, a pair of films that earned $2.98 billion in worldwide box office revenue.
In 2018, Legendary returned to Warner Bros. with a straight output deal rather than a slate co-financing arrangement. Under this new agreement, Warner Bros. would distribute Legendary’s movies for a fee, shifting the relationship dynamic. This deal marked Legendary’s transition from being solely a film financier to developing and controlling its own intellectual property, essentially transforming into a signification studio-level production company. Since then, Legendary has co-financed and co-produced “Dune” and “Godzilla vs. Kong” in 2021, with both movies scheduled to have sequels released in 2023 and 2024.
Relativity Media
Founded by Ryan Kavanaugh, Relativity Media was a notable slate co-financier. The company first structured a deal to provide Marvel Entertainment with a $525 million revolving line of credit from Merrill Lynch Commercial Finance Corp. Later in 2005, Relativity signed a $528 million co-financing transaction with Warner Bros. Under the deal, it agreed to co-finance a pre-selected slate of six films to be released within the following 16 months. Each of the six films would be at least 50% co-financed by Relativity. Behind the scenes, the company quickly created a reputation for being capable of raising reliable and substantial capital, a characteristic that every studio values highly.
Relativity’s co-financing partnership with Warner Bros. paved the way for creating the Gun Hill Road I and Gun Hill Road II financing vehicles in 2005 and 2006. The Gun Hill structures were the first to provide capital to two studios at once, co-financing movies for Sony and Universal simultaneously. Gun Hill Road I encompassed $600 million in hedge fund capital primed for investment, providing 50% funding for at least 17 movies. Subsequently, Gun Hill Road II further solidified the partnership, as Relativity contributed an additional $700 million to finance at least 19 films.
In 2008, following the success of the Gun Hill Road structures, Relativity introduced two new financial transactions, namely Beverley I in collaboration with Sony and Beverley II with Universal, effectively segregating their funding arrangements. Intended initially to co-finance 45 films, Beverley I concluded prematurely after 18 films were produced. As for Beverley II, it provided financing for approved Universal films in the period spanning from 2008 to 2012. Relativity served as a 50% co-financier in both cases for three-quarters of the respective studios’ slates.
From 2005 to 2012, Relativity co-financed 91 movies for Sony and Universal, including pictures from franchises like Fast & Furious and Hellboy, as well as successful individual movies like “Step Brothers”, “Paul Blart: Mall Cop”, “Zombieland”, and “Bridesmaids” and Oscar-winning movies like “The Social Network” and “Les Misérables”. However, to continue its growth, Relativity began operating as a mini-major studio in 2010, an endeavor that bled the company dry of cash after most of the company’s movies performed poorly at the box office. Unfortunately, Relativity filed for bankruptcy in 2015 and never regained its previous prominence in the industry.
Dune/RatPac-Dune Entertainment
Dune Entertainment has also been a notable co-financier throughout the years. In 2006, Dune Capital Management and 20th Century Fox established a partnership that emerged as a remarkable example of collaboration between Wall Street and a studio, providing off-balance sheet financing for movies with great success. Initially led by Steven Mnuchin and Chip Seelig, Dune Entertainment and 20th Century Fox joined forces for three financing transactions, amounting to $400 million, $325 million, and $500 million, from 2006 to 2013. This partnership marked one of the early examples where Dune invested in nearly all of 20th Century Fox’s film slate rather than selectively choosing specific titles.
In 2013, Dune continued its success by helping establish the RatPac-Dune Entertainment financing partnership with Warner Bros., one of the most substantial slate co-financing deals in recent history. RatPac-Dune was a newly formed partnership led by Mnuchin’s Dune, along with filmmaker Brett Ratner and Australian billionaire James Packer, that facilitated a deal valued at $450 million, covering Warner Bros.’ entire film slate outside of other existing production financing deals, including those with Village Roadshow Pictures, Gulfstream Pictures, Alcon Entertainment, and all the Harry Potter films.
In 2019, Warner Bros. acquired the RatPac-Dune library, which included a 15% to 25% stake in 76 films. The library comprised minority stakes in highly attractive films such as “Gravity”, “The LEGO Movie”, “Godzilla”, “Annabelle”, “American Sniper”, “Mad Max: Fury Road”, “Batman V Superman”, “Wonder Woman”, “Dunkirk”, and “It”. Despite its relatively small percentage of ownership, the library generated considerable interest from multiple bidders due to the appeal of the movies and the reliability of the revenue. Throughout its lifetime, the library earned over $10 billion in worldwide box office revenue and was ultimately sold back to Warner Bros. for a significant profit to investors.
Skydance Media
Skydance Media was founded by David Ellison, son of the billionaire founder of Oracle, Larry Ellison, in 2009. It has achieved significant success as a co-financier and a trusted partner of Paramount. After four prosperous years, which included investments in blockbuster successes like “True Grit”, “G.I. Joe: Retaliation”, and “World War Z”, Skydance provided $700 million in additional capital to continue co-financing Paramount movies. Additionally, Skydance evolved into a production company and entered a first-look deal with Paramount, granting Skydance the option to co-produce select Paramount films. Conversely, Paramount had the opportunity to co-finance, co-produce, and distribute all Skydance projects in development. This arrangement allowed Skydance to selectively choose which projects to co-finance and co-produce, providing greater creative and financial flexibility. This essentially elevated Skydance from a co-financier to a studio-level production company, the first step in a decade of continued growth and expansion. Skydance Media has since then formed Skydance Television and Skydance Interactive and signed a multi-year feature film deal with Apple TV+, producing their own movies for the streaming service.
From 2009–2021, Skydance contributed over $2 billion in co-financing for more than 20 films. The 20 movies co-financed during this time included franchises like Mission: Impossible, Star Trek, and Terminator. While Skydance primarily operates with AppleTV+ now, it has agreed with Paramount to continue co-financing and co-producing franchises like Jack Ryan, Mission: Impossible, Star Trek, Terminator, Top Gun, and Transformers. The initial co-financing deals’ success helped position Skydance as a prolific player in the market.
The Future of Slate Co-Financing
One trend that may shape the future of slate co-financing is the growing significance of digital platforms. With more and more consumers embracing streaming services, studios have already begun to adapt their financing models to cater to content specifically tailored for these platforms. As the digital streaming presence grows for studios and becomes a necessary element of content allocation strategy, demand for capital will continue to increase. Securing co-financing for these opportunities will remain crucial, and the availability of capital from co-financiers, such as MCT, will become increasingly critical.
Another trend that will likely influence the future of slate co-financing is the rising significance of international markets. With the global film industry expanding, studios will need to adjust their financing strategies to accommodate this evolving landscape. As studios aim to create content with broader international appeal, there will be greater demand for financial resources. Additionally, the growth of streaming platforms and their increased distribution capabilities will present co-financiers with abundant opportunities to collaborate with major studios and invest in and co-finance premium content on a previously unprecedented scale. With a focused approach, studios are allocating substantial investments into developing local language productions to adapt existing IP for diverse markets. By prioritizing the growth of this market, studios anticipate a costly yet rewarding endeavor. Leveraging successful IP for local language content development presents an unprecedented opportunity for co-financiers to invest in proven storylines that have already succeeded in other markets, offering a significantly reduced risk investment proposition.
As competition in the entertainment industry intensifies and demand increases for high-quality blockbusters, studios must invest in premium content to attract and retain viewers. The shift toward higher-budget films will require even more significant capital investment, increasing the need for co-financing partners. The current landscape presents a unique opportunity for co-financiers to partner with Hollywood studios. As the theatrical business recovers to pre-pandemic levels, studios will have multiple revenue streams available for their movies. The new revenue streams provide a higher revenue ceiling for studios and will introduce additional profit and risk mitigation for co-financiers. Specialty finance companies capable of providing studio co-financing, like MCT, are positioned to negotiate advantageous profit-sharing arrangements and generate even greater returns.
