Inside $1 Billion Dollar The Hobbit Trilogy Gamble

The Hollywood Reporter has posted the cover story for their October 26th issue of the magazine as the recount why Warner Bros. and MGM are willing to gamble $1 billion on The Hobbit Trilogy. Below is the highlights and you can find the full article here and photo gallery here.

Highlights
- The cost of the first two movies are estimated around $315 million each to make (most big budget movies land in the $150 to $200 million range) but others are saying its inflated and New Zealand tax rebates will drop cost to $200 million each.
- Cost of the third film is unknown since a lot of it was already filmed as additional footage for first two
- To get the budget he wanted, Peter Jackson deferred his fee (but I assume he has back end points or something to make up the difference)

MGM Completes Restructure

It seems that MGM has completed its restructuring as it begins to move towards moving out of bankruptcy and back to filming making and hopefully profitability. According to Deadline, "As part of its exit financing, MGM raised $500 million to fund operations, including production of a new slate of films and television series."

As far as the Hobbit is concerned, I don't think it will have any impact good or bad as MGM has already reached a deal with Warner Bros to sort out paying their half of the production of the two films. Mostly it means that there is a good chance that the next 007 film (and others) might be hitting the production pipeline soon.

The Hobbit Gets Green Light, Peter Jackson Directing

The day The Lord of the Rings fans have been waiting to hear has come. The Hobbit has received the official green light. Peter Jackson has signed on to direct. Doesn't get any better than that really. From THR:

The announcement, made jointly by New Line president and COO Toby Emmerich, Warner Bros. president and COO Alan Horn, and MGM co-CEO Steve Cooper, says the "the two films based on 'The Hobbit' are now greenlit and will begin principal photography in February 2011, under the direction of Peter Jackson."

For the last 9 or so months, Peter Jackson has been working on unofficial pre-production for the films. At this point the only meaningful delay is making sure MGM has the money to pay for production and getting actors hired, signed, and fitted for costumes. Assuming these major obstacles can be overcome within a reasonable time frame, the tentative schedule to begin filming is February.

On the financial front, the LA Times reports there is at least a plan in place to sure that MGM can cover their half of the $500 million cost of the two films.

Although MGM is still not financially able to foot its part of the bill, it had to commit to the production before filming could start. MGM is expected to talk to potential funding sources, including other studios that could handle foreign distribution on its behalf. As a backup plan, Warner Bros. has agreed to loan MGM the money in exchange for additional rights to the picture beyond the domestic distribution it already controls.

The actor boycott does have a plan B, complete with a near two week deadline set by Peter Jackson to reach some resolution. However, NZ Equity, MEAA, SAG continue to drag their feet on having the necessary meetings to reach a resolution. They also continue to shun the press and avoid providing any specifics on what demands they want to have addressed. Assuming the unions behave as they have for the last three weeks, production will have to move to another country which will complicate the start date. The move may not necessarily end the boycott but supposedly part of the reason for the boycott is the production wasn't unionized to begin with. If it is moved to a country that already has union agreements in place, then the boycott becomes moot, sadly at the cost of thousands of New Zealand jobs and billions in revenue.

The Dominion Post did got a few additional statements.

“Exploring Tolkien’s Middle-earth goes way beyond a normal film making experience” Jackson said, "It’s an all-immersive journey into a very special place of imagination, beauty and drama. "We’re looking forward to re-entering this wondrous world with Gandalf and Bilbo - and our friends at New Line Cinema, Warner Brothers and MGM”.

“There is no human being on the planet as qualified as Peter Jackson to direct these films,” said Warner Bros president Alan Horn. “Peter is incredibly talented and has the creative vision and experience to bring this beloved property to life in a way that no other film-maker could."

“Peter is a filmmaker of incomparable ability; having him return to Middle-earth to produce and direct is a dream come true. A true original, Jackson is a gifted story-teller, visionary director and pioneer in film technology,” said New Line Cinema president Toby Emmerich. “Reuniting with Peter, Fran and Philippa on truly makes it feel like we are going ‘there and back again.’”

Jackson: No Movement, No Green Light

Despite recent reports that MGM may be closer to sorting out its financial difficulties that may pave the way for The Hobbit films, Sir Peter Jackson says that the film status has not really changed in any meaningful way. Jackson spoke with Empire Online about the true status of the film.

“We are nowhere different to any other reports or conversations,” Jackson told us last night. “We haven’t got a greenlight yet. We’re still waiting. Things still seem to be inching closer to some sort of happy place. I keep hearing that so many times now I’ve stopped tuning into it.”

“We’ve seen these reports before, reports saying there was going to be a greenlight in a couple of days — well, a week’s gone by and there isn’t one," adds Jackson. "You can’t believe everything you read. There is only one thing you want to believe and that’s when the studio announces a greenlight. As far as I’m aware that’s not going to be today. I keep hearing positive things. Everyone’s working very hard. There’s a lot of people at Warner Bros. who are working around the clock trying to manoeuvre through the MGM complexities. MGM is a company that is about to go bankrupt and in a way they are about to take The Hobbit into bankruptcy hell with them when they go down. Warners are trying to extract The Hobbit out of the bankruptcy hell before it happens. It is just so complicated I can’t even put my head into it. It’s all to do with American copyright laws, bankruptcy laws. A lot of Warner Bros. lawyers are working round the clock at the moment trying to make it happen so let’s see."

The goal seemed to be to control expectations and prevent fans from getting too excited or impatient. Realistically, until MGM sorts out its problems, the Hobbit will not move forward. As Jackson suggested WB could buy out MGM's 50% ownership but MGM's future plans seem to rely heavily on The Hobbit films and they will not give up that stake easily. Basically to sum it up, no MGM as a functioning studio = no Hobbit films.

MGM Prepares for Official Bankruptcy

In the sometimes weird world of business, the news that a storied studio such as MGM is nearing an official filing of bankruptcy is actually a good thing, especially for The Hobbit fans. According to Reuters, Metro-Goldwyn-Mayer has put together a proposal that would wipe away about $4 billion in debt and put founders of Spyglass Entertainment in charge. In return for forgiving the debt, the current creditors would be converted to owners with 95.3% ownership of MGM with rest going to Spyglass.

The reason this is good news is it finally frees up the finances of MGM to return back to financing movies and other projects rather than continue to attempt to interest payments on the existing debt. Current creditors have until October 22nd to approve the plan. If approved, it would probably guarantee the green light for The Hobbit films and allow filming to start in January as currently planned.

The Hobbit Close to Green Light?

A new article from LA Times Blog indicates that The Hobbit is finally on the verge of an official green light after nearly a year of unofficial (but still costly) pre-production on the film. Two major hurtles, MGM's bankruptcy and actor unions' strike, seem on the verge of being cleared. It seems that MGM's in paying the nearly $500 million production might be loaned to MGM by Warner Bros. to go ahead and get the official go ahead. The goal seem to be to avoid further delays and still hit now desired Christmas 2012 and 2013 release dates.

MGM is eager to make the films, people close to the situation said, and could give Warner Bros. the official okay in the next few days. However, it will still need to secure its half of the financing. Barber is expected to approach a number of potential investors, including studios including 20th Century Fox, which has an existing deal with MGM to release its movies overseas. Other possibilities include outside financial investors or Warner Bros., which could loan MGM its share in exchange for additional distribution rights to the pictures.

People close to the project said that, barring a last-minute glitch, they expect to have all issues settled shortly in order to begin production in mid-January so that the first of the two movies would be ready for a holiday 2012 release. The second film is planned for a December 2013 opening. If production doesn't begin by the first quarter of next year, the people said, "The Hobbit" will miss its planned release dates and will likely have to once again be delayed.

If this green light comes as planned with a January start date, Sir Peter Jackson is on the verge of signing the deal that will bring him back to the director's chair for the film. Overall, assuming everything lines up as hoped, this is fantastic news for fans of the Trilogy.

Studios Respond to Actor Unions

New Line, Warner Bros. and MGM have officially responded to multiple Actor Unions (in US, Australia, UK, and Canada) demanding their members boycott The Hobbit production claiming to "have refused to engage performers on union-negotiated agreements." Peter Jackson had responded previously to their threats and below is the official studio response.

New Line, Warner Bros. Pictures and Metro-Goldwyn-Mayer Pictures are concerned by the recent allegations of unfair treatment of actors in New Zealand and instructions from the performers’ guilds to their membership to withhold services from the producers of “The Hobbit” in New Zealand. We are proud to have good relations with all of those performers’ guilds and value their contribution to the motion pictures produced in their respective jurisdictions throughout the world. But we believe that in this case the allegations are baseless and unfair to Peter Jackson and his team in Wellington who have been tireless supporters of the New Zealand motion picture community.

To classify the production as “non-union” is inaccurate. The cast and crew are being engaged under collective bargaining agreements where applicable and we are mindful of the rights of those individuals pursuant to those agreements. And while we have previously worked with MEAA, an Australian union now seeking to represent actors in New Zealand, the fact remains that there cannot be any collective bargaining with MEAA on this New Zealand production, for to do so would expose the production to liability and sanctions under New Zealand law. This legal prohibition has been explained to MEAA. We are disappointed that MEAA has nonetheless continued to pursue this course of action.

McKellen On Start Date, MGM Update

Two pieces of The Hobbit news. The first is from Sir Ian McKellen who supported the ongoing rumor that filming will start next year. He told the Bolton News that "the aim is to start filming in January" and that he remains on board to reprise the role of Gandalf. Not sure if a contract is in place but doubtful since the film has not been green lit.

The continued financial difficulties of MGM is pretty much the only major obstacle to preventing that January start date and it seems there is some good news on that front. Bloomberg is reporting that there is some movement on a plan to restructure the company by filing for Chapter 11 bankruptcy. This will allow the company the room it needs to restructure without having to worry about being forced to sell of its properties piecemeal. However, the plan requires approval from the various creditors. Despite the $3.8 billion in debt, it seems the studio believes they can emerge out of the bankruptcy by the end of the year. Assuming all goes according to plan, then there is little reason that The Hobbit cannot begin principle photography in January.

MGM Reorg Plan Devised

It seems the saga of the MGM bankruptcy that has prevented the Hobbit films from being made might be getting closer to ending. Spyglass Entertainment has devised a plan that may eliminate $4 billion in debt that has prevented the studio from moving forwards with its main purpose of making movies.

I don't have a business degree so don't really understand the ends and out. Might be better off reading the Hollywood Reporter and Variety articles about this. To sum, the plan is turn ownership of the studio to a new set of owners who will have a percentage ownership into the studio. They in turn will provide around $500 million in capital so the studio can start making movies again. I am sure it is more complicated then this but the idea is the re-org could be completed by December which means movie production could start back up by early 2011. What impact this will have on The Hobbit is unknown but at this point any news is good news. Links via OneRing.

MGM Nears Potential Deal

Its seems there just might be light at the end of the tunnel for getting The Hobbit films made as rumors are emerging that "Spyglass Entertainment is nearing an agreement to run Metro-Goldwyn-Mayer Inc once the film studio restructures $4 billion of debt this summer through the bankruptcy process." It seems the grand plan is to somehow restructure the debt under Chapter 11 with current creditors forgiving MGM's debt in return for the studio’s equity. Click here for the Reuters article.

I don't have a business degree so don't really understand how it works but it seems the creditors are hoping that the profit potential of the company in the long term will be greater than the current value of the company if they were to cut up its properties piece meal or sell it outright to another studio. Considering MGM has a huge library of movies, substantial franchises like The Hobbit, Stargate, James Bond, Robocop and so many more, there is little reason the company cannot succeed. Pretty much the only reason MGM got into this situation to begin with was a series of poor choices in executives to run the company.

In theory, if everything falls in to place, it sounds like the company may be able to actually restart its core business of making movies once again sometime in October. However, that is a huge maybe as it seems that there are many different stakeholders in this situation, any of whom could kill this and other possible solutions to MGM's financial problems.

Spyglass to Run MGM?

The Wall Street Journal is reporting that Spyglass Entertainment (Star Trek, GI Joe, Get Him to the Greek) is considering taking over the running of MGM as the studio tries to "restructure a roughly $4 billion debt load this summer." This would put Spyglass co-heads Gary Barber and Roger Birnbaum in charge of the studio. This aligns with indications that the studio's creditors would rather attempt to run the studio to increase its value rather than outright selling it at a bargain basement price. Deadline reports Summit Entertainment (Twilight franchise) is also in the running.

The creditors are deciding between proposals submitted by both studios and also MGM's current management team. It seems the creditors like Spyglass' presentation more, probably helped that the studio would get less of the MGM pie then Summit. MGM's own proposal is considered risky as they are asking for another $1 billion in capital to "bankroll a slate of expensive blockbusters."

To the winner is the ability to oversee the The Hobbit films, future Bond films, a 3 Stooges film, Stargate franchise and more. MGM's storied history presents lots of franchises and opportunities to bring the studio around. The main issue is they have been plagued with management teams that seem focused on squandering opportunities (and money on themselves) and not properly exploiting beloved franchises effectively (a bunch of direct to video releases is not effective use for example). What the future holds is unknown and until it is, The Hobbit remains in greenlight limbo. (via TheOneRing)

Update on MGM Situtation

Business Week has written an article that provides an update on the financial straits of storied studio Metro-Goldwyn-Mayer (MGM). The studio is financially underwater with $3.7 billion in debt and while there are suitors to buy the studio, no firm decision has been made by its creditors on what solution will allow them to recoup as much of that debt as possible.

Proposal number one is for the creditors to run the studio themselves. Considering the multiple franchises the studio owns, careful use of their properties could lead to new found strength for the company. See Marvel and their success story as they went from a nearly bankrupt company to a worthy addition to the Disney brand. The franchises that could be tapped include The Hobbit films, James Bond, Pink Panther, Stargate and really anything from their extensive library of films. However, desperate times often leads to desperate decisions which means bad choices could actually cause the debt to grow. The increase in losses would start immediately as the creditors would have to invest at least $500 million just to "jump-start" production.

The second choice is to cut their losses and sell the studio and all those franchises to Time Warner who was the highest bidder in the March auction with a $1.5 billion bid. The current value of the company is only $1.6 billion, more than half of what the debt is so the losses would be huge.

If they go with decision reviving the studio, two franchises are really just a quick infusion of cash away from starting. Production on the 23rd James Bond film was suspended when the problem with MGM mounted but this suggests that at least some of the scripting, casting and other decisions have been made. The Hobbit films have also been in unofficial pre-production mode with props, sets, scouting, scripting and design being conducted as a run up to an official greenlight. While the Hobbit suffered a set back with Guillermo del Toro no longer attached as director, filling that role should not take that much time once the final disposition of the studio is determined.

Business Week's sources indicate the creditors are giving serious consideration to reviving the studio in the hope to increase its market value to at least $2 billion and possibly sell those franchises in a piecemeal fashion. For example, James Bond's estimated value is $750 million (which seems low to me).

Sadly for The Hobbit fans, what all this really means is there is no end in site on the MGM situation so no telling when the films will finally get the greenlight and budget necessary to move forward.

McKellen Updates His Hobbit Status

Sir Ian McKellen, currently in Australian appearing in the play Waiting for Godot, provided a quick update on his status of The Hobbit films and reprising his role as Gandalf to Whats Playing.

“That should have started [production] in April but they didn’t contact me about a contract until a few weeks ago and we’re in negotiation”, the actor, who’d be reprising his Lord of the Rings‘ role Gandalf for the film, said. “I shall see (director) Guillermo del Toro and (executive producer) Peter Jackson when I’m in New Zealand after we’ve been to Australia and well find out more then.”

Continues McKellen, “I’ve read the script, or as much as had been written, they sent it to me, which was very accomplished and good, I thought, and a wonderful part, Gandalf. But I don’t have a contract and I don’t have a start date, so there we are. We’re in a bit of limbo at the moment”.

The likely reason for the lack of a contract is due waiting on the sale of MGM. Once that is completed and the new owners sort the details out, the films can get the official greenlight which means a budget which means the means to pay out the contracts. Until then the films remain in a kind of limbo with completed scripts and most of the pre-production work getting completed "off the books" so to speak until the official word comes down.

MGM Lives, Hobbit Stays

Movie studio MGM has had some financial trouble lately that led to concerns that could affect their participation in making The Hobbit films. Thanks to a new agreement with their creditors, the studio may have bought enough time to stay afloat and complete their partnership on the Hobbit films which is at this point is probably critical to the studios continued survival.

From The Hollywood Reporter:

The investment firm leads a lenders steering committee that has been agitating for a dramatic restructuring of the Lion's operations and its ownership structure. In exchange for an agreement to limited interest forbearance, J.P. Morgan secured a few changes in existing debt terms.

Concern over MGM's hold on "Hobbit" is at the heart of the activity. In a 50-50 rights partnership with Warner Bros.' New Line unit, two "Hobbit" pics are being developed.

The first "Hobbit" aims for theatrical release in 2011, with Guillermo del Toro on board to direct that and a sequel. Peter Jackson, Fran Walsh, Philippa Boyens and del Toro are writing scripts for both and are expected to deliver the first screenplay by the end of November.

The move to delay interest payments until Dec. 15 wasn't motivated by any immediate fears of insolvency at MGM, as a recent company audit showed cash flow should be sufficient to keep the lights on for at least another year.

Eventually, once equity is shifted from the Lion's current owners to the lenders group, an auction likely will be held for the studio. Keeping its 50% hold on "Hobbit" -- broadly viewed as a potential big moneymaker -- would bolster interest in bidding on the Lion.

MGM execs hope to corral at least $40 million for its "Hobbit" activities. The requested interest deferrals amount to more than $50 million.

Current MGM owners include investment firms Providence Equity and TPG, Sony and Comcast.

A banking source said some of the tweaks to debt terms will begin to dilute those owners' current equity. A much more dramatic shifting of equity is expected over coming months as lenders agree to convert debt to equity.

Once the lenders become owners, that group likely would conduct an auction for the assets. Nobody sees the lenders group as a long-term operator of MGM.

I do not know a lot about banking but it seems the goal is to essentially shore up MGMs bottom line so the studio can be sold piecemeal at a higher value. It is possible the studio could be sold as a single unit but more than likely a bidding war is going to erupt on many of its franchises, especially James Bond, and its library of movies and television properties. It seems like the storied history of this studio is going to come to an end very soon.

MGM Trouble Threatens The Hobbit?

According to Deadline Hollywood, the rumor mill is suggesting that MGM is on the verge of bankruptcy. The rumors indicate the storied studio needs $20 million for operating costs and another $150 million to fund various projects including The Hobbit which the studio is a partner with Warner Bros.

The studio is apparently already in debt for around $3.7 billion but only worth $1.5 billion if sold today. The net result is if the studio folds, then most of its projects including Hobbit, James Bond, Stargate and more will become mired in bankruptcy proceedings and other issues while taking care of its debt. This may lead to selling of those franchises and other delays that may affect funding and thus production of the Hobbit films.

For now this is all speculation and even if confirmed the legal wrangling required to get through the knot of debt could take many months to work out so may be a while before determine what impact, if any, this news might have on The Hobbit films.