Barron's Jan 1990
Will It Play in Peoria?
Mel Brooks Gets Ready for His Wall Street Debut
by Jaye Scholl
(Originally published in Barron's Jan 1990)
Los Angeles - When it comes to satirizing Hollywood and show business, no one does it better or funnier than Mel Brools. From his first film The Producers, released in 1968 , to Spaceballs, in 1987, Brooks has used his wit to parody Broadway theater, the cinematic treatment of the American West, horror films, silent movies, psychodramas and science fiction. Brooks came off as an industry iconoclast, the bright kid in the back of the class who would rather crack jokes than join the honor society.
But now Brooks proposes to perform the quintessential L.A. act and take himself public in two weeks. Call it the vanity IPO, whereby a well-known Hollywood type, usually a producer or star, literally captializes on his (so far, no woman has tried this) reputation by selling to a bedazzled public shares in a company with more glitz than assets. Brooksfilms plans to offer 1.5 million units for $9-$11 each, with a unit consisting of one share of common stock and a warrant to buy more shares within five years.
As vanity IPOs go, the Brooksfilms offering isn't the greediest by a long shot. A sellout at $11 a unit would raise about $25.5 million. Compare that with the pure-play personality IPO benchmark set by Aaron Spelling, producer of such television hits as Charlie's Angels, The Love Boat and Dynasty (but lately, getting more press for building the second largest house inthe U.S.). At the height of the Hollywood new issue frenzy in 1986, Spelling, with Drexel Burnham Lambert's help, personally pocketed $63 million by peddling 4.5 million of his own shares while the company realized only $14 million from the sale of newly issued stock. Italian filmmaker Dino De Laurentiis raised a staggerring $240 million in a combination of stock, debt, and limited partnerships here and in Australia in 1986. But investors aren't saying, "Thank you, PaineWebber" to that underwriter. De Laurentiis Entertainment Group filed for bankruptcy in 1988.
Why is the 63-year-old Brooks going public? " I want to make movies. I'm an energetic guy," he said in a conversation at Brooks's rented office on the backlot of Twentieth Century-Fox Film, hi artistic home for the past 20 years. With him was Alan Schwartz, a white-haired, soft-spoken lawyer who has been Brooks's close friend and legal adviser for over 30 years. After the offering, Schwartz will quit his private practice to become president and chief operating officer of the new company for $350,000 salary, a $50,000 "nonaccountable" expense account, and 10% of Brooksfilms' pretax profits. Brooks, chariman and chief executive officer, will pay himself a $400,000 salary, and take 20% of the pretax profits. In other words, 30 cents of every dollar of earnings goes out the door to Brooks and Schwartz before it reaches the bottom line.
According to Schwartz, the idea of going public came from and investment banker at Mabon, Nugent: "I said no. We had lots of discussions about limited partnerships or equity financing. Then I became acquainted with Joel Reader [a managing director at Opeenheimer & Co.]. Joel said the market was turning for small, talent driven companies. We were told [by others], 'Don't go public, get a major investor.' But we wanted freedom of product..."
Brooks interrupts. "I didn't want a single rich man to call me on the phone to tell me his niece has just graduated from drama school. The public, the shareholder, won't do that."
Of the 19 films that Brooks has been involved in, all but one or two - he and Schwartz don't agree whether the exception is Solarbabies or Fatso or both - have had net receipts. Hollywood lingo for money left over after every conceivable expense has been paid. that's good. It indicates he's unlikely to make a Heaven's Gate or Ishtar, two of the more soctly flops in the Eighties. Brooks has various deals with big studios to co-finance and/or distribute his films. Sometimes he gets a percentage of net receipts, sometimes a percentage of the gross, but more recently he has fought to keep foreign distribution rights.
The reason is clearly that he has his marketing eye fixed on European demand. Television shows and films loom as rich possibilites there as governments relinquish control of television broadcasting and as cable, satellite transmission, pay-per-view and the home-video markets expand. Brooksfilms intends to line up some of these foreign outlets in advance. Then it's going to ask writers and directors to forgo their typically big up-front fees in exchange for a share of the guaranteed European, Asian and - who knows? - Romanian profits.
Success doesn't depend completely on fishermen in Brittany appreciating Brooks's zany Jewish humor parodying the Wild West. Brooks has also produced some "serious" films - Frances, 84 Charing Cross Road. and The Elephant Man. But so far, the comedies have been the big commercial hits. And Jerry Lewis notwithstanding, humor seldom travels well.
The price of the offering relies heavily on a projected stream of income from so-called library revenues - fees paid to Brooks for the continued exhibition of his films, Joel Reader at Oppenheimer likens the library to real estate. Reader thinks it can throw off $4 million a year for the next five years. He's added another $3 million in cash and $1 million or so in prepaid expenses to arrive at a $24 million value for the company. With three million shares outstanding before the offering, that works out to $8 a share. Reader thinks the warrants will trade between $2 and $2.50 a share, which brings us, or at least him , to the $9 -$11-a-share price.
There is, of course, another big asset that isn't on the balance sheet. "Would it be immodest of me to say I'm a magnet for talent?", asks Brooks. Not at all. He has been the principal writer, director and producer for many of the company's films. But the problem is, this asset can not only walk out the door, but also into the door, which is why the company plans to buy a $10 million "key man" life-insurance policy on Brooks with some of the proceeds.
What is clear is that this IPO gives Brooks a chance to liquefy himself, to somehow quantify the value of him sitting around with writers every afternoon at Fox. It's one more chance to see how much his audience loves him.
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