By MERISSA MARR - June 27, 2007; Page C1 - online.wsj.com/article

L.A. Firm Bets On Hollywood Ending For Profit Deals

What if there was a way to invest in the future movie earnings of Brad Pitt or Angelina Jolie? What kind of risk would they represent? And what would be their biggest source of income in 10 years time -- DVD sales, television airings or Internet downloads?

Those are the kind of questions being asked these days by Todd Wagner and Mark Cuban, the billionaire owners of professional basketball's Dallas Mavericks. The business partners are backing Content Partners LLC, a new Los Angeles firm attempting to corner a market in buying actors, directors and producers out of what are known as "profit participation" deals on movies and TV shows.

These profit-sharing deals typically promise such participants a percentage of a project's revenue or profit from the box office or DVD sales.

In the Content Partners proposal, the Hollywood figures will trade the right to all or part of such future earnings for a lump sum of cash now. Then, Content Partners -- whose chief executive is Steven Kram, a former executive at the William Morris talent agency -- deals with collecting the revenue stream.

The entertainment industry has proved a risky playground for experimental financial strategies. The Content Partners plan is reminiscent of the so-called Bowie bonds that were used in the late 1990s as a way to invest in the future earnings of a musician.

The original 10-year bonds were based on David Bowie's anticipated record royalties on music from before 1990. The sale of the bonds raised $55 million. Other musicians followed, but the Bowie structure lost its glamour when the music industry began its slide early this decade. The Content Partners deals are buyouts, rather than loans such as the Bowie bonds, however.

Messrs. Wagner and Cuban are betting they can make a profitable business out of bundling profit deals and aggressively collecting what is owed under them. The duo already is known in Hollywood for challenging the conventional way of doing business. For example, they own a movie-theater chain that is releasing movies in various digital formats.

Such profit deals can bring in many millions of dollars for A-list talent. Tom Cruise, for instance, had a profit deal under his previous contract with Paramount Pictures that gave him as much as 30% of gross box-office receipts for acting in and producing his movies, plus a slice of DVD revenue, according to people familiar with the deal. His last movie under that contract, "Mission: Impossible III," sold $398 million in tickets and a similar amount of DVDs.

Still, since these payment streams can last for years, if not decades, some actors have to chase down checks, even waging legal wars to get what they say is owed them.

Mr. Kram said the company has several deals locked down and that it has offered upfront payments totaling $40 million for other deals.

The company won't disclose details of those deals except to say that clients it is talking to or has done deals with include a director seeking to self-finance a movie, the creator of a hit TV series who wants to cash in now rather than wait years for payments and an actor wanting to buy a vacation home.

Philip Hacker, a senior partner at accounting firm Hacker, Douglas & Co., which audits profit deals for movie series such as "The Lord of the Rings" and "Star Trek," said other likely clients are the estates of deceased actors or directors that often pass deals "from generation to generation" but would rather cash in now.

One risk is that Content Partners is essentially gambling on the future of the entertainment industry. In calculating the lump sum it is willing to pay, Content Partners estimates how much revenue a movie is likely to generate from the box office, DVDs and television. The movie industry is in the midst of a transition, with DVD sales slowing, piracy increasing and Internet distribution emerging.

Christa Thomas, a banker at J.P. Morgan Chase & Co., which is putting up half the initial $100 million of financing for Content Partners, notes the deals the company buys "have been through the riskiest part of their life cycle."

That is because Content Partners buys a profit deal only after a movie has been released in theaters or a TV show has gone into syndication. Thus, they have a pretty good idea how it is going to perform down the road. One risk is that the performer does something to undercut their popularity or the company paying the checks goes out of business.

Mr. Wagner said Content Partners aims to limit that risk by buying a broad range of profit deals. There are some deals it won't touch, such as certain foreign distributors that have particularly complex accounting. It is working on deals with foreign tax funds that have invested in movies, however. Beyond actors, it would consider buying out a hedge fund that has financed a slate of movies or a talent agency's profit deal on a vintage television show.

A key to success is getting enough volume to create a diversified portfolio that generates a steady stream of income.

Michael Sherman, an entertainment attorney at Jeffer, Mangels, Butler & Marmaro LLP, said selling part of a deal may be appealing if just to hand over the burden and cost of auditing, dealing with disputes and enforcement.

 
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