UA CLOSES $500M DEAL WITH MERRILL LYNCH, BUT IS WALL STREET LOSING ITS TASTE FOR HOLLYWOOD? (LAT, VAR, WSJ)

By Nancy Vialatte

While yesterday saw reports that Goldman Sachs and Deutsche Bank had pulled out of underwriting a $1 billion slate financing deal at MGM, United Artists, which is being resuscitated by Tom Cruise and Paula Wagner and MGM, closed a $500 million deal with Merrill Lynch. The deal will see 15 to 18 films financed over the next 5 years. But while the deal was widely expected, financing from investors in the US, Europe, Asia and Africa comes amid a tightening credit market on Wall Street that has made some deals appear shaky.

The LA Times reported today that MGM disputed a news report that Goldman had withdrawn its commitment to underwrite the separate $1 billion deal with company spokesman Jeff Pryor saying the Lion remained in discussion with Goldman and other banks but chose not to do a deal now, in part to focus on the UA deal.

And, while The Wall Street Journal and The LA Times both say that fears are being stoked in Hollywood that Wall Street�s love affair with the movies is on shaky ground, one busy dealmaker said the fact the UA deal didn't come apart was good news for the entertainment industry and future fundraising efforts, according to Variety. "There's no death knell for investment in the entertainment industry," he said.

MGM chairman Harry Sloan told Variety that no delays in the franchise fund would impact the movies it has in the works, including "The Hobbit," a co-production with New Line, or the next installment with the Bond franchise, which it is co-financing with Sony.

Yet, the Journal notes, just as Wall Street's top-flight banks poured billions of dollars into financing groups, or slates, of movies in the past couple of years, few are on track to make healthy returns. That�s mostly because the studios only included their riskiest movies. Now, as the banks face a squeeze in the credit markets, Hollywood financing may prove to be a disposable form of high-risk funding, says the WSJ.

Some already announced deals, meanwhile, have been grappling with challenges in the syndication markets. When banks started doing these deals a few years ago, they would usually agree to a "best efforts" deal with the studios, meaning they would only commit to a deal if they could underwrite it to reduce their risk. (WSJ)

More recently, however, banks have committed to deals before underwriting them. As several banks struggle to syndicate new deals at acceptable prices, some are reverting back to "best efforts" deals.

People familiar with the situation say that is what happened with the MGM deal. MGM officials say they are the ones proceeding with caution in the uncertain marketplace. "It was us, not the banks, who slowed down the franchise film fund," says Harry Sloan, chairman and chief executive of MGM. (WSJ)

Hollywood has recently been eyeing two other funds for signs of uncertainty. The funds, called Gun Hill I and Gun Hill II, raised money for Sony Pictures Entertainment and General Electric Co.'s Universal Pictures. Both funds were backed by Deutsche Bank and structured by Ryan Kavanaugh, a former venture capitalist who has made a name for himself in Hollywood as the poster child for the recent wave of Hollywood slate-financing deals. Mr. Kavanaugh's firm Relativity Media also is an equity investor in the funds. (WSJ)

Gun Hill II raised $700 million in 2006, providing $385 million for 11 Sony films and $315 million for nine Universal films.

Deutsche Bank has struggled to underwrite all the mezzanine debt on Gun Hill II, according to people familiar with the situation, says the Journal which notes that sources say the bank has considered selling some of the debt below par.

Before that, Gun Hill I raised around $600 million, providing roughly $400 million for 11 Sony films and roughly $200 million for nine Universal films. Deutsche Bank successfully syndicated that deal. But the deal has included such flops as "All the Kings Men," which earned just $9.4 million at the box office world-wide. The final movie in the fund is the thriller "The Kingdom." Mr. Kavanaugh says: "We are pleased with the performance of Gun Hill I to date and we are hopeful that it will result in a profitable scenario for all involved." (WSJ)

Other slate-financing deals have also faced challenges in the syndication markets. Morgan Stanley took its time syndicating a deal for Paramount Pictures' specialty arm Paramount Vantage, after some of the first movies in that deal performed poorly. A person familiar with the situation said Morgan Stanley finalized the syndication July 27, although it is unclear at what price. (WSJ)

Amir Malin, managing principal at Qualia Capital, told the Journal that some investors in these deals have been burned because they didn't have industry experience and they "misunderstood the gamble inherent in some of these transactions."

Meanwhile, on the UA deal, Wagner said, "The closing of this financing is an important milestone for the new United Artists. It leaves us perfectly poised to realize our vision of making movies that are both important and commercial," reported the LAT.

The Merrill Lynch financing is effective immediately and will cover two UA film projects already underway, including the November release of the Robert Redford-directed "Lions for Lambs," a political drama set in Afghanistan starring Cruise and Meryl Streep. The second film is "Valkyrie," a World War II thriller directed by Bryan Singer and also starring Cruise. (LAT)

UA CLOSES $500M DEAL WITH MERRILL LYNCH, BUT IS WALL STREET LOSING ITS TASTE FOR HOLLYWOOD? (LAT, VAR, WSJ)

By Nancy Vialatte

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