At his post Cabinet press conference last week, Prime Minister John Key was asked (by me) whether the government-convened talks to keep The Hobbit in this country had included the possibility of raising the level of film production subsidies available in New Zealand. “No,” Key replied, “that hasn’t been on the agenda.” Interesting. Offhand, I can’t recall any other negotiations where this country has had so much at stake, and where we have seemed quite so complacent about going into them at a trade disadvantage.

After all, it isn’t as Minister of Economic Development Gerry Brownlee isn’t aware of the benefits or major film productions to New Zealand – both now, when we’re offering a 15% rebate on the local spend by foreign film companies or later, if we chose to raise our bid slightly. Last year, Brownlee reportedly put the case for production subsidies this way – “Can anyone tell me what’s wrong when we put up 15% and they give us 85%?” Right. Yet surely, the same logic applies if the ratio is 20% to 80% – or even if we raised our subsidy level to the 25% that some parts of Eastern Europe are now offering, and settled for a 75% share of the bounty? That still sounds like a good deal to me. Why isn’t Spada – not to mention Sir Peter Jackson – putting on the table at least the possibility of the government sweetening our bid? After all, back in January, Spada’s Penelope Borland was saying publicly that “in fact New Zealand now has one of the more modest rebate schemes for international productions.” Exactly. So why is Spada (and everyone else) now choosing to ignore that reality?

Take Avatar as a case in point. For that film, the New Zealand Large Budget Screen Production Grants Scheme paid out $44.69 million to Avatar’s producers. Yet that rebate (do the math and the final sum comes out slightly below a 15% rate) was in return for a direct spend of $307 million within New Zealand. On top of that economic activity directly contributed by the production, there would have been multiplier effects downstream, with considerable amounts clawed back in tax. Now, if we were offering 20% rebates, the Avatar payback would have been at most, $61.4 million. At a 25% level, they would have topped out at $76.75 million. By any measure, that’s still a bargain for getting a $307 million direct spend, plus loads of additional intangible benefits from the association with James Cameron and his team. Again, why isn’t the government at least thinking about raising our production rebates, to keep us in this very lucrative game?

If such a response truly isn’t being considered by the Key government, this must mean either (a) The Hobbit production is already in the bag for New Zealand, thanks mainly to Jackson or (b) the location shoot is as good as lost, and the government will be more than happy to blame the unions for it. In either case, the government may as well come clean and change the name of the Large Budget Screen Production Grants Scheme to the Sir Peter Jackson Screen Production Grants Scheme because in future, it seems highly likely that only major productions either directly or indirectly linked to Weta will be coming to New Zealand. Disney’s pullout this year from the Waitakere studios looks like a sign of things to come.

The MGM Sale

As mentioned before, one of the factors holding up announcements about The Hobbit location shoot is the still unresolved MGM sale. Initially that was expected to be concluded on October 22, when creditors were due to respond to an offer all but agreed with Spyglass. This deal would put MGM into a chapter eleven bankruptcy – allowing the shedding of its $4 billion debt burden – from which it would emerge with creditors exchanging debt for a 95% equity stake in the newly-constituted company. Spyglass would own about 5% and its executives Roger Birnbaum and Gary Barber would be running the new MGM. The need for creditors to digest more details of this plan has now pushed D-Day back for a week until October 29, which also happens to be the day that MGM’s latest debt rollover expires. Journalists Nikki Finke and Mike Fleming have put the plusses and minuses of the Spyglass deal very succinctly here:

The Spyglass plan would transform MGM into a pure production company and close down its marketing and distribution divisions. That would certainly cut costs in the short run. Coupled with the equity that Spyglass would bring to the table, a streamlined MGM would lower its debt and have a shot at raising new funding to finance its own pictures. That would let Barber and Birnbaum do what they do best, which is to lower risk by making domestic and offshore distribution deals. On the other hand, MGM would have to pay others to distribute and market its films — and those fees could be comparable or higher than the monies saved on overhead.

That last sentence could be the deal breaker. Because, as I mentioned last week, Lionsgate have also re-emerged on the scene with a new offer of their own. What Lionsgate and its maverick shareholder Carl Icahn are offering is a 55% debt to equity swap for creditors, and the merging of MGM’s prized library with Lionsgate’ own considerable back catalogue and marketing savvy. To most commentators, the Spyglass deal offers higher short term gains from the initial savings on overhead, but a greater risk of MGM falling back into the same hole a year or two down the track. Arguably, a Lionsgate/MGM merger would offer a better and more sustainable fit, long term. However such a deal would also bring the quintessential corporate raider Carl Icahn on board at MGM – and judging by his track record, Icahn doesn’t seem the sort of investor who would be very interested in building MGM’s value over the long haul. Still, they could try casting him as Smaug the dragon.

How is the outcome of the MGM deal likely to impact on The Hobbit calculations? As mentioned, the Spyglass option means that MGM would shed its marketing and distribution arms, and there would be considerable costs downstream in contracting out those roles to say, Warners, their co-partner on The Hobbit. According to the Los Angeles Times, these arrangements are already being explored, presumably in the context of the Spyglass option:

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.

Those are among the extra costs that the Warners/MGM bean counters will be running through their calculators, and they will be stacking them up against the higher production subsidies available elsewhere in the world. I can’t see how any final decision on these matters – or on The Hobbit – can be made at Warners before the MGM creditors finally choose their poison, come October 29.

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