Poor DVD sales hamper U.S. film financing deals

Wed Apr 22, 2009 5:09pm EDT
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By Sue Zeidler

LOS ANGELES (Reuters) - As the credit crisis forces banks to scale back investments in Hollywood, a weak DVD market -- long an industry growth driver -- is adding to the challenges of getting films financed.

U.S. consumer spending on home entertainment fell 4 percent in 2008, in the first decline since the advent of the DVD, according to Bernstein Research analyst Michael Nathanson. DVD sales are estimated to have fallen 6 percent last year.

Operating margins at film studios, which have grown on the back of DVD sales for most of the decade, contracted 110 basis points in 2008, Nathanson wrote in a report on Wednesday.

He predicted demand for DVDs to fall further over the next five years as the maturing market slowly transitions to high-definition Blu-ray and digital distribution models, which offer lower profit per transaction.

Bankers say these trends are factoring into financing negotiations between lenders and studios, such as Time Warner Inc's Warner Bros, Viacom Inc's Paramount, News Corp's Twentieth Century Fox, Sony Corp and Walt Disney Co.

"Consistent with the financial markets as a whole, film lenders and investors are taking a much more conservative approach to structuring deals then they previously had," said Eileen Burke, principal of West End Capital and Advisory.

"If a company's business plan relies on robust DVD revenues, it's likely to be an area where lenders will haircut projections and their lending advance rates. It's a part of the overall analysis you do when determining how much 'lending currency' is available for a particular deal," she said.

From 2005 to 2008, hedge funds partnered with all the major banks from Merrill Lynch to Lehman Brothers to pour about $15 billion into films, financing studio "slates" of as many as a dozen movies at a time and collecting returns after the films were released or started generating DVD and TV revenue.   Continued...

<p>A woman walks inside a DVD rental shop in Taipei February 18, 2008. REUTERS/Nicky Loh</p>