‘The Godfather’ studio is hoping for an offer it can’t refuse

Behind the fabled arch off Melrose Avenue, Hollywood history is everywhere. Over here is the stage where “Rear Window” and “The Graduate” were shot. Over there is Lucy Park, a nod to “I Love Lucy” and Lucille Ball.
From “Prisoner of Zenda” in 1913 to “The Big Short” in 2015, from Valentino to Leo, Paramount Pictures is the longest-running studio in Tinseltown, spanning the golden ages of both movies and television.
But today’s Paramount, whose own lot stood in for Jack Woltz’s in “The Godfather,” has faded like so many one-time stars, a stripped-down outfit struggling to reclaim a long run of glory. Its parent, Viacom Inc., has put a stake up for sale, and the question captivating the entertainment business is whether it can attract an outside investor to help restore the mojo.
“Paramount has fumbled away a lot of things in the last few years,’’ said Jonathan Kuntz, a historian and professor at the UCLA School of Theater, Film & Television. It’s been a hard fall for a studio “that was the No. 1 biggest in Hollywood for most of the 20th century.”
Analysts can reel off missteps and missed opportunities under former Viacom Chairman Sumner Redstone, current Chairman Philippe Dauman and studio chief  Brad Grey. Among them: letting go of deals with DreamWorks Animation (now tying up with Comcast Corp.) and Marvel Entertainment (now in the hands of Walt Disney Co.). “We’ve obviously had a rough patch,” Grey said in an e-mail. “But we have taken the right steps to lay a strong foundation that has us optimistic about the future.”
Will auctioning off a chunk of turn things around? It depends on what Viacom does with the money, which by some calculations could be USD1 billion.
Dauman, also Viacom’s chief executive officer, has said he’d like the buyer to be a technology company or one with international reach. That could be of strategic help in navigating the digital-media landscape or gaining traction in markets such as China. Bidders are being winnowed to a “handful” from more than 40, he said last week.
Several potential bidders, including Tencent Holdings Ltd., took a look at the stake but are unlikely to bid because it will probably come without the power to make changes or take control, according to a person familiar with the matter. Tencent declined to comment. DMG Entertainment and Media Co., the Chinese company that co-produced “Iron Man 3” with Disney, has expressed interest, according to another person who asked not to be named discussing private information. That would be a twist, considering the first two “Iron Man” films were put out by Paramount.
The studio lost distribution rights to movies from the action-hero factory Marvel after Disney bought it for $4 billion. As for the deal with DreamWorks Animation, that expired in 2012. Then 20th Century Fox picked it up, taking with it such franchises as “Kung Fu Panda” and “How To Train Your Dragon.” Now DreamWorks Animation is set to be acquired by Comcast, which owns  Universal Pictures, in a deal valued at $3.8 billion.
“If they had DreamWorks Animation and Marvel right now, they would be possibly the No. 1 studio still,” said Jeff Bock, an Exhibitor Relations Co. analyst. “Those are huge high-profile pieces to the kingdom that they lost.”
Paramount is valued at $4 billion, according to Barton Crockett, an analyst with FBR & Co. The studio was $136 million in the red in the quarter that ended March 31, and Viacom has projected a loss for the unit for the year.

Al Pacino and Marlon Brando

Of course, studios fade and roar back all the time, and Paramount may be into reboot mode already. Its 2016 roster includes “Star Trek Beyond,” another “Jack Reacher” starring Tom Cruise and “Silence,” from Martin Scorsese. Shooting has started on “Fences,” directed by Denzel Washington, and in March a three-year production deal was sealed with Leonardo DiCaprio, arguably the biggest acting star of the moment.
The lineup is “definitely a rebuilding slate,” Bock said. It’s one with risks, particularly “Ben Hur,” a co-production with MGM due in August – 57 years after the Charlton Heston version snared 11 Academy Awards, a record unmatched until 1997’s “Titanic.” “You don’t remake a film that won Best Picture,” Bock said. “What are the odds you make a better film?”
One of the biggest blunders for the studio may have taken place a decade ago, when Redstone, Viacom’s controlling shareholder and chairman emeritus as of February, stripped Paramount of its TV arm – whose hits include “NCIS,” one of the longest-running shows in history – and gave it to CBS Corp. That was a painful loss, because television, it turns out, is the big Hollywood business, the industry’s fastest-growing segment. “I Love Lucy” reruns alone are worth almost $20 million in annual revenue, CBS CEO Les Moonves has said.
The hand-off occurred when Viacom and CBS were separated after six years under the same roof. CBS also walked away with premium cable’s Showtime. Showtime’s operating profit has about tripled since, according to SNL Kagan.
The movie studio was a star for a while, with huge releases like “Indiana Jones and the Kingdom of the Crystal Skull” and “Star Trek.” Grey, a former talent manager who produced HBO’s “The Sopranos,” engineered a turnaround after he was hired as CEO months before Viacom and CBS separated. In 2007, Paramount ranked second among the majors in terms of share of the U.S. box office. In 2011 – the year of “Transformers: Dark of the Moon” and “Mission: Impossible – Ghost Protocol” – it was on top.
That was the peak. Grey cut back on the schedule, putting out 10 movies in 2013. The studio came in seventh place in box-office sales that year – behind the so-called mini-major Lions Gate Entertainment Corp. Paramount ended 2015 last among the six majors with 5.9 percent of the domestic box office, despite “The Big Short,” nominated for five Academy Awards and winner for best adapted screenplay, and “Mission: Impossible – Rogue Nation,” which scored worldwide sales of $682 million.
Viacom didn’t put enough muscle into the studio, cutting back on film investments as it faced financial shortfalls, according to people familiar with the parent company’s recent decision making. Viacom’s net debt has more than doubled over the past five years to $12 billion. A six-year stock buyback program ate up $15 billion – more than net income over that time. The stock has dropped 20 percent over the past five years, compared with a 52 percent gain for the Standard & Poor’s 500 Index.
Another problem, UCLA’s Kuntz said, is that competitors have mastered the franchise formula that spits out endless sequels and adaptations and spinoffs. “Everyone has their great series and Paramount has fallen behind.”
Disney, for instance, has splurged on acquisitions, grabbing Pixar and Lucasfilm in addition to Marvel, guaranteeing a torrent of content, chief among it “Star Wars.” Universal drilled into more from “Fast and Furious” and “Bourne” and produced a string of “Despicable Me” features. Warner Bros. has its DC Comics superheroes, and made a mint off the “Harry Potter” books; Fox has “X-Men,” “Planet of the Apes” and “Avatar.”
Paramount was relatively late to the animation game, setting up its in-house division in 2011; the first offering was last year’s “The SpongeBob Movie: Sponge Out of Water,” a modest hit. The studio got back into the television business in 2013, and its dozen current productions include “Maniac” for Netflix Inc., “School of Rock” for Nickelodeon and “Minority Report” on Fox.
Paramount is getting back on track, Grey said. Its animation division is now targeting three film releases every two years, and the TV studio has sold 10 series and three pilots. Marc Evans was brought in last year to replace Adam Goodman as president of the studio’s motion-picture division. “After a dip in our theatrical production output, we have changed leadership and are on track to hit output targets of 15 films a year for 2016, 2017 and beyond,” Grey said.
Crockett, the FBR analyst, said whatever happens with the stake sale, what the studio needs to do is make more TV and better movies. “It’s kind of simple.” Christopher Palmeri, Anousha Sakoui & Lucas Shaw, Bloomberg