Weinstein (pg. 2)
Not every movie has underperformed. One of the high points has been the animated feature "Hoodwinked," which generated about $51 million at the domestic box office. The Weinstein Co. paid nothing upfront for the North American distribution rights and expects to make a profit of $19 million. Others that might not look like big hits at the box office but proved profitable for the company were "Clerks II" and "Lucky Number Slevin." Each brought in slightly more than $20 million at the box office, yet both cost less than $10 million to make.
But even those small victories couldn't erase, at least as far as the board was concerned, the disappointment of "Grindhouse." No two directors are more closely associated with Harvey and Miramax's success than Tarantino and Rodriguez. Miramax was often referred to as the "House That Quentin Built," but Rodriguez has been the highest-grossing director for the brothers - his movies, such as "Dusk Till Dawn" and the Spy Kids franchise, brought in more than $400 million in box-office receipts for Miramax, mainly through Bob's low-budget horror and comedy division, Dimension.
In an interview in Cannes, Harvey said that it was his brother, Tarantino, and Rodriguez who all insisted that "Grindhouse" be released as a double feature rather than as two separate releases (as they are doing internationally). "I said, 'Guys, 'Grindhouse' is a great concept, but nobody wants to sit for 3 1/2 hours or four hours.' At the end of the day, one of the things you do in this business is support your directors, especially ones who have made as much money as these guys have over the last 16 years."
Harvey continued: "So on the face of it, 'Grindhouse' looks like a flop. But like everything else I do, it's not quite what it seems. Not only is it not a flop, it will make a modest profit. The shame of it is, we should have made a fortune."
In the misty world of movie accounting, the estimated profits of a film are based on projections of how much revenue a title will bring in years down the road from sources such as DVD sales and pay television. The industry term is "income ultimates" - and Harvey saying "Grindhouse" will be profitable is a hopeful expression based on how much revenue the company estimates the film will bring in over ten years. (The film cost close to $83 million to make and market. So far it has brought in about $25 million from the domestic box office and $46 million from sales to foreign distributors.)
The Weinstein brothers' current doldrums stand out when compared with their past success at Miramax. Founded in the 1970s in Buffalo, where Harvey and Bob beat the bushes to find music acts to promote, Miramax became a New York beachhead where a generation of independent filmmakers waged war on the Hollywood establishment. The duo eventually sold Miramax to Disney in 1993 for $70 million. They lived large for the next decade on an annual operating budget of $700 million and built a film library worth an estimated $2 billion by the time of their exit.
When Goldman Sachs set out to raise money for the brothers in the summer of 2005 - as their association with Disney was coming to a close - the bankers crunched the numbers for every movie Miramax and Dimension had ever made and compared their profit margins with the Hollywood average. According to Goldman Sachs, Harvey's movies averaged margins of 12% to 13%, and Bob's averaged in the 22% to 24% range. The Hollywood average is close to 8%, about the average margin that the Weinstein Co.'s slate has posted so far. In other words, so far the brothers are merely ... average.
"Give these guys enough at-bats and they'll get it right," says Joe Ravitch, the banker at Goldman Sachs who arranged the Weinstein Co.'s original financing and remains a close advisor. "No one works harder than these guys."
In the business plan the company presented to prospective investors, the brothers and Goldman Sachs projected revenue of close to $500 million in 2006 and $1 billion in 2007. By 2010 the company projects revenue of $1.8 billion. Being privately held, the Weinstein Co. does not release financial data, but several sources confirmed that the actual revenues are far from their targets. A Weinstein Co. executive said the company is estimating that its revenue will be off about 12% at the end of 2007, compared with the original projections. (This is not an apples-to-apples comparison, since the 12% figure includes revenue from its home distribution arm, Genius, that was not included in the original projections but nevertheless boosts sales.)
Operating losses - the company is hoping to be profitable in 2008 - are smaller than projected because the brothers have been adept at managing costs. (The overhead for the entire operation is about $50 million a year.) That's perhaps comforting, because some prospective backers were hesitant to invest, given the perception that the Weinsteins were wild spenders. "[Harvey said] 'Richard, that's just not the case, and certainly will not be the case with the Weinstein Co.,'" says Richard Perry, the hedge fund heavyweight whose Perry Capital is an investor. "I think they've proven that they are businessmen and have really managed the budget."
Interviews with several people who have direct knowledge of the company's finances make clear that the next six months are crucial. If the remainder of the company's 2007 slate of movies does not perform well in theatrical release, the company could be forced back to the debt markets to raise additional capital. "We have more than enough capital on our balance sheet to operate the business today," says a company executive. This person said the company's plan was always to "fully utilize" the capital it raised and to "opportunistically seek capital opportunities when and if it makes sense."
Some investors blame Harvey's hanging with hedgies and honchos rather than filmmakers for the box-office shortfall. "We raised our money to make a film company. We need to make our money on that, then diversify when we have profits," says Ben Ammar. Some of Harvey's diversions have included broaching the idea of a Lions Gate merger with Carl Icahn (the Wall Street heavyweight is a big shareholder in Lions Gate (Charts)), paying for a dinner in New York to honor Wal-Mart (Charts, Fortune 500) CEO Lee Scott's environmental initiatives, and scouting out vodka brands to buy. (Harvey himself rarely drinks - a Diet Coke is usually within arm's reach.)
Then there are the company's three aforementioned nonfilm investments: the social-networking website aSmallworld, a stake in the arts cable channel Ovation, and Halston. All told, the cash outlay for the investments was about $5 million, and it is unclear when any of them will make a significant contribution to the company's bottom line. In the case of aSmallworld, former AOL executive Bob Pittman, who is also an investor in the website, says, "What Harvey is really good at is understanding audiences and audience segments. By understanding segments, he can go in to other businesses [such as aSmallworld]."
Halston could have upside. The fashion house is a venerable - although beaten down - brand name, and the Weinstein Co. didn't put any money upfront, gaining equity from Neema Clothing, a New York apparel manufacturer, through a commitment to use the Halston name in Weinstein movies. The Weinsteins immediately brought onboard Jimmy Choo president Tamara Mellon to consult. The inspiration for the deal, per Harvey, was Israeli producer Arnon Milchan's investment in the sportswear company Puma. Milchan began buying Puma shares in 1996, and when he sold out in 2003, he made hundreds of millions of dollars.
Even though Harvey is spending more time on movies, he hasn't abandoned the multimedia game. Fortune has learned that the Weinstein brothers and hip-hop moguls Jay-Z and P. Diddy are partners in an as-yet-to-be-announced cable and Internet venture focused on music, movies, and fashion called Channel Zero. Also, the company plans to announce a deal to publish a Profiles in Courage-style tome by Britain's incoming Prime Minister, Gordon Brown.
The most significant deal for the Weinstein Co. to date is a pact with the publicly traded home video distributor Genius Products. The Weinsteins took a 70% stake in the company, which is traded on the over-the-counter market, and Genius distributes Weinstein movies in exchange for a 5% fee - much lower than the industry average of closer to 10%. Genius has been able to capitalize on the cachet of the Weinsteins, bringing in clients such as ESPN. But more important for the Weinsteins, the value of the company's equity in Genius is now worth close to $400 million - an asset that could be sold one day if they are strapped for cash.