Universal Says It Will Acquire October Films

Universal Pictures said it is acquiring a majority interest in New York-based specialty movie distributor October Films, which released such critically acclaimed titles as “Secrets and Lies” and “Breaking the Waves” as well as the box office flop “Lost Highway.”

The acquisition would put the last of the significant independent film companies in the hands of the Hollywood majors. The purchase is modest by the financial standards of the entertainment business--less than the cost of the average studio film--but it underscores an important strategic move by the major studios to diversify their businesses with lower-cost, quality movies that give them access to cutting edge creative talent.

If the deal is approved, all of the studios, with the exception of Paramount, will own an autonomous or in-house specialty film label.

The structure of the Universal deal, which has been incubating for months, is based on October’s future performance. Sources say Universal will pay an upfront cash price of $10 million to October’s shareholders, plus a variable payout over the next five years.

That sum will depend on how successful the 5-year-old company is over that period. A source said that if October’s operating results are “drastically higher,” the additional payout could be worth $50 million or more.

Under the plan, which is subject to shareholder approval and other customary conditions, Universal would assume full ownership of October at the end of the five years, according to October principal John Schmidt, the former chief financial officer for Miramax Films, who, along with his partners Amir Malin and Bingham Ray, holds a minor stake in October.

The company’s significant shareholders are New York investment banker Allen & Co. (21%) and the New York-based money management firm Siegler, Collery & Co. (31%).

Under Universal’s ownership, October would continue to operate autonomously in New York and would market and distribute its films theatrically in the United States and internationally in all media. When October’s existing agreements with various outlets expire, Universal would take over distribution of its films in all other domestic and ancillary markets, including home video, and pay, free and network TV.

For October, the deal would mean getting access not only to Universal’s distribution outlets but also to its financial resources, which would help it compete with other specialty film companies, such as Disney-owned Miramax, Warner Bros./New Line’s Fine Line, PolyGram’s Gramercy Pictures and MGM’s Samuel Goldwyn Co. Sony and 20th Century Fox each have in-house specialty units--Sony Classics and Fox Searchlight.

Sources say Universal is prepared to put as much as $100 million a year into October to help fund the production, acquisition, marketing and distribution of its movies.

“We are really pumped about taking the company to the next level,” Schmidt said. “Having Universal’s investment behind us will also help us in terms of our capital structure--raising bank debt and using that to really ramp up our production and distribution business.”

Where October has traditionally acquired North American rights to the movies it releases, the plan would enable it to exploit the foreign rights as well and help it grow its own international sales business.

Schmidt said the company would go from releasing 10 to 12 films a year to 20 to 22 a year, with an even mix of productions and acquisitions. The company has concentrated on acquisitions rather than productions, funding its activities through internal cash flow and bank debt.

“We’ve done it with a limited capital base,” said Schmidt, adding that “it’s entirely appropriate that this is a performance-based deal because we’ll remain very entrepreneurial and profit driven . . . and now we can afford to compete on a much more aggressive basis.”

October was born in 1991 in the Sherman Oaks garage of Jeff Lipsky, who founded the company with Ray and subsequently left in 1995. It was reincorporated the following year with capitalization raised by Allen & Co.

As the October partners would find, it was hard weathering the volatile world of independent theatrical distribution business against competitors like Miramax backed by major companies.

From Universal’s standpoint, the acquisition is important to its diversification strategy.

“It helps us broaden our portfolio of product,” said Universal Chief Operating Officer Chris McGurk, who spearheaded the deal. “We don’t want to just depend on the big event films.” The “risk-reward” nature of the specialty business, said McGurk, is obviously very different from a studio’s often costly core business.

“And it allows us to operate with three individuals [the October principals] who deal in a different world of talent than we do,” he added.