Basics:

This is positioned as a new-age film production company that aims to become one of the handful of independent producers in the US.

The presentation understandably includes lots of video and entertainment content including a video testimonial form Gerard Butler (he thinks it’s a good investment! ;-).

The Film Department is based on the premise that they can produce studio quality films for less and that the supply and demand in the industry is now favoring producers like themselves. Figures quoted say that there were just over 600 films produced in 2008 and 520 in 2009. This trend is expected to continue to reach 350-400 films per year. This means more demand, longer runs and better economics for producers.

Fewer films also translates into more top talent available at attractive pricing. That fact, combined with good relationships with talent agencies, has helped the company secure star talent like Catherine Zeta Jones who can transform a so-so movie into a substantial success both in the US and Internationally.

The management team is fairly convincing about knowing what they are doing, and their experience at Miramax suggests they know what phase of the market we are in. Historically, they have produced films like Crash on very small budgets with big studio results. History includes Amelie, March of the Penguins and a fairly impressive array of films with about $1B of box office revenues.

From an industry standpoint, management notes that many independent producers have gone of business and the survivors have limited production ability and lack efficient distribution.

Digital revenues are growing fast, creating yet another revenue opportunity for new films and increasing the library value from back catalog films that people still want to see.

A four year deal for TFD with Showtime is put forth as a key barrier to competition since these deals are now very rare and hard to get. There are few companies doing these deals and they have cut the amount of theatrical content in half in the past few years.

TFD strategy involves a large stable (15) of projects with budgets in the range of 50% of standard studio levels ($10-45M.) Pre-selling international distribution has been a key strategy to lower risk. International distributors are hungry for content since the major studios self-distribute.

Management reviewed the top 5 of their current 15 projects and at least one (The Peak) is 3D. It’s hard to render an opinion about these short descriptions but they sound at least good enough for films you might watch on an airplane. Management goes on to make the case with several projects that top talent want to work on their films.

Deal is planned to raise $60M, which is down from what the company needed before some recent success and lower costs.

Basic financial stats are $40M in revenues and a small operating profit of $1M for 2009.

In conclusion, the company feels that demand for filmed entertainment is up and supply is more limited and this gives them a major opportunity to gain market share and expand their business.

Open Questions:

If the profits are strong, will this industry attract more production and start to unwind the structural fundamentals the company is basing their investment case on?

There is no real financial model presented even as a target. How large is compensation? How do we know that whatever success the company has will end up accruing to equity holders? It’s the #1 typical problem with deals in this area.

Who is IPO Solutions (the lead manager) and how are they going to distribute, support and cover the stock in the aftermarket?

What are the best comparable companies for The Film Department? Lionsgate is one but everyone else is huge.

Preliminary Conclusion:

At the mid-point of the range ($13) the deal values the company at an EV of $190M ($175M in market capitalization, plus another $15M or so of debt still outstanding after the pay-down post deal.)

That puts the valuation on a TEV/Rev at 4x on based on 2009 revenues which is extremely rich compared to other companies. For example, Lions Gate (LGF) trades at 0.5x sales and Disney trades at 1.8x sales.

As much as we like the company, the films, and the idea of it all, the valuation makes no sense and there are no structural guidelines to suggest that even if this is a home run that the equity holders will get the benefits.

This deal could be restructured to make it more attractive to potential investors by creating explicit structures for investors to know how much they will make when projects and the company does well. It could be publicly traded but might be better received as a royalty/partnership/trust/asset instrument instead of a traditional public company that has to report quarterly results.

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