Artisan IPO May Be as Shaky as Footage From ‘Blair Witch’

Artisan Entertainment, the independent distributor behind the low-budget horror hit “The Blair Witch Project,” wants to sell stock in itself. How appropriate. Owning shares in movie companies usually ends up being a really frightening experience.

Even scarier is that while Artisan prepares its initial public offering to raise as much as $140 million, the company is roiled with internal tensions, much of it surrounding the Internet strategy that first put the company on the map with “Blair Witch” last summer. The internal concern is that Artisan is grabbing the quick cash rather than spending time to develop a broader entertainment company with a significant Internet component. The shortsightedness has already cost the company a key executive.

It’s not the sort of thing an investor gets from reading the company’s stock prospectus.

This Friday, John Hegeman, the 37-year-old marketing whiz largely credited with making “Blair Witch” a phenomenon by promoting it in cyberspace, officially leaves his post as Artisan’s head of marketing to join former Disney Studios chief Joe Roth in his new company. He’s leaving after a feud with Artisan Chief Executive Mark A. Curcio.

Hegeman, who’s based in New York, is widely regarded in Hollywood as the best Internet marketing strategist in the movie business, first turning heads for successfully launching the 1994 film “Stargate” over the Internet when he was an executive at MGM.

Inside Artisan, Hegeman’s departure is considered a big loss that could have been avoided. Curcio failed to support Hegeman’s longtime dream of launching a genre-specific Web site. To Hegeman, this was a natural extension to the company’s “Blair Witch” initiative.

But the problems extend beyond Hegeman’s departure. Artisan’s board stripped sole responsibility for Artisan’s Internet business from Curcio earlier this year, worried that he was squandering the Internet-related success of “Blair Witch” by moving too slowly to develop that area. Curcio now shares that responsibility with Nicolas van Dyk, head of strategic planning, New York-based co-president Amir Malin and Santa Monica-based co-president Bill Block.

Artisan has taken baby steps with the Internet, claiming it has a number of deals in the works and owns a stake in online movie company Sightsound.com.

At most entertainment companies, a fight about an Internet strategy might not amount to much because so many are still flailing about, trying to figure out how to exploit films in cyberspace. But at Artisan, the ability to sell a movie over the Internet is what set it apart from other companies. Artisan’s prospectus filed with the U.S. Securities and Exchange Commission credits the “Blair Witch” Internet site with being “largely responsible for turning the release of the movie into a ‘must-see event.’ ” The movie, which cost Artisan $1.1 million, became a surprise box-office smash, grossing $142 million domestically and more than $100 million overseas.

Sources said Hegeman was livid with Curcio for first backing then changing his mind about fully financing his pet project--”Distant Corners,” an Internet site aimed at horror, fantasy and science fiction fans. After providing $400,000 of initial seed money, Artisan made a corporate decision last fall not to invest an additional $1.6 million that Hegeman needed to launch the site.

Hegeman subsequently met Roth, who instantly agreed to fund and be his partner in the Web site, of which Artisan holds a 14% equity stake.

Sources say Hegeman and Curcio also clashed in personality and style.

Hegeman, in the throes of negotiating his exit agreement with Artisan, declined to comment. Curcio, Malin and Block also declined to comment as the company is in a “quiet period” required by the Securities & Exchange Commission before an IPO. The offering is intended to bolster Artisan’s financial strength and give it stock to use as currency for potential acquisitions.

The only Artisan official willing to talk was Mitch R. Julis, a company director whose investment company Canyon Capital Advisors owns 16.4% of Artisan. He stands behind Curcio.

“I love Mark Curcio’s skills and I think he’s doing a great job. The board is very supportive of the job Mark has been doing,” Julis said.

Some at Artisan have a different view of Curcio. Sources say Curcio, a button-down executive at Bain Capital before becoming Artisan’s CEO in 1997, now travels in Hollywood’s glam circles. Recently, he celebrated his 40th birthday at Hollywood’s trendy Sunset Room nightclub, owned by producer Elie Samaha.

The timing of Artisan’s IPO comes not only as the company is still basking in “Blair Witch,” but also when investors are obsessed with “content” in the wake of the Internet explosion and such mega-mergers as the proposed America Online-Time Warner. After the offering, the public would own slightly less than 25% of Artisan.

But buyers beware. Hollywood’s independent movie companies, including Savoy Pictures, Carolco Pictures and Cinergi Pictures, have a long history of leaving public investors out in the cold.

Then there’s the question of whether Artisan is a one-hit wonder that will have a tough time repeating its “Blair Witch” success. So far, none of the company’s other releases, including “The Limey,” “Stir of Echoes,” and its Oscar nominated documentary “Buena Vista Social Club” has come anywhere close to “Blair Witch’s” commercial success, though most have broken even or made some money.

Artisan is shooting a “Blair Witch” sequel for release in October at a production cost of $15 million. Still, part of what made “Blair Witch” hip and unique was the grass-roots, word-of-mouth way it emerged from nowhere. And that won’t happen with a sequel.

Granted, Artisan is more than “Blair Witch.” Its core asset is a library of 3,300 feature films--the vast majority of which are domestic video rights--(plus 3,400 non-theatrical titles), to such hits as “Terminator 2: Judgment Day” and “Basic Instinct.”

Artisan’s other revenue-generating businesses includes an extensive Family Home Entertainment library and a direct-to-video unit.

To its credit, Artisan has yet to show the kind of profligate spending that plagued earlier small, publicly held entertainment concerns.

Still another reason Artisan might be a tough sell is that its IPO comes at a time when investors have myriad sexy Internet investments to choose from. A highflying “dot-com” will outshine any non-diversified movie company that eats cash in a business with thin margins where the payoff, if any, can take years.

Artisan was launched in 1997, the successor company to video distributor Live Entertainment. The company’s biggest shareholder (with about 36% of the company) is Audax Entertainment, founded by former Bain Capital executives Geoffrey Rehnert and Marc Wolpow. They took control of Artisan last fall and will maintain control after the offering.

Block owns the most stock, with 8.2%; Curcio has 7.8%; and Malin 5.2%. In total, the executives and directors own nearly 93% of the company.

So, what’s Artisan’s end game? There are some who believe that Artisan was conceived as a library play to be eventually sold, and that Curcio, Malin and Block would like nothing more than to cash out.

Sources are certain that for the right deal--$400 million to $500 million--Artisan’s investors would sell to a larger company in a nanosecond. They suggest that perhaps Artisan is launching the IPO in hopes of bringing bidders out of the woodwork. If that happens, at least small-time investors will be spared.