Co-Developing and Co-Producing

On a recent trip to the U.S., it became clear that many of our friends and associates in that country, whether broadcasters, major studios or independent production companies were more keen than ever to discuss how we put co-development and co-production deals together. With the recent further spate of mergers and consolidations in the U.S., it has become an even tougher and riskier market place for both development and fully-fledged production. Indigenous producers are now looking more intensely at Europe as the model both for creative partners and financial ideas and collaboration.

It was rather a novel sensation to feel envied for being European for other than artistic reasons, even more so to be told by one top studio executive that, "Right now the European animation market place is more buoyant and varied with a lot more going on than in the U.S. We know it's still a tough market there, but you Europeans are used to having to pull the financing from so many different sources -- for us it's a newer experience..."

This individual was right on a number of counts: yes, we Europeans are used to it; yes, we are good at pulling deals together; and yes, it's tough. In fact, one might say that putting a co-production deal together is an art form in itself, presenting endless challenges. But boy, what a great feeling if you can pull it off both financially and creatively. Add to this the fact that we are also used to getting series initially financed for the European market with (hopefully) a U.S. sale usually occurring once the series is made. Suddenly this is making co-production with European partners an attractive option in the U.S.

No Set Model Or Formula
One clear fact about European co-development and co-production deals is that every deal is different, every new alliance calls up new issues to be addressed and overcome -- from allocation of production work, compliance criteria to trigger tax breaks or subsidies or grants to allocation of rights (which themselves may affect or be affected by those very same tax breaks, subsidies or rights). This is before we even get into the deficit finance obligations of each partner or apportionment of distributors' advances or pre-sale monies...

Let us be clear though, there are a substantial number of European co-productions which do not involve the use of grants, subsidies or tax breaks at all, just straightforward "financial engineering" or the piecing together of a deal using a combination of any of or sometimes all of the following:

• Pre-sale; distribution advance; deficit finance; license fees; insurance backed schemes; contract discounting.

In short, a process which I call "getting a mini-skirt to fit an elephant!"

Government sponsored grant and subsidy schemes are not available in all countries in Europe. The biggest scheme operates in France with a big role played by French broadcasters. Germany has largely regional schemes, although the establishment of dedicated Animation Investment Funds in Germany, such as the Berlin Animation Fund and the Victory Media Management Fund, has combined regional and commercial funding into a powerful investment resource.

Under the auspices of the E.U., the Media programme provides support for the development of certain projects in the form of loans for up to 50% of the development cost, which are repayable once a project goes into production. In the U.K. there are certain tax advantages for private investors in production.

All of the above entail compliance with various rules and conditions. In particular, the French schemes and, to a lesser degree, the German and U.K. schemes require that various percentages of the total work required to complete the production are undertaken in the country originating the scheme by an indigenous production company.

As a recent in-depth world-wide survey of the animation industry suggested, co-producers from other countries may find under these schemes that they have to sacrifice a disproportionate share of work and sometimes of revenues. Our view is that if it can be made to work, for the right production, that's great -- there is, after all, no such thing as a free lunch, but very often it's a case of making that "mini-skirt" from other sources, be they broadcasters, distributors, banks or other production companies.

Daunted? If you're European, you can't be. It comes with the territory (or should I say territories?!). If you're non-European, stick with us kid! Your European partner will, of necessity, work it out.

First Things First
There are three basic tenets to co-development and co-production (whether in Europe or internationally):

1. Find the right partners

This may appear self-evident, but for us at Varga this is key. In our view, too many projects in Europe have ended up being made with the wrong partners purely because they could bring in a certain subsidy or access to finance with the result that it shows on the screen -- the infamous "euro-pudding" [4] applied to animation.

A. Mutually creative vision and goals
Developing relationships is key. The many conventions and conferences held under the auspices of CARTOON [5] and the commercial TV and dedicated animation markets held in Europe help in this respect, but of course personal day-to-day development of relationships is what really counts.

Similarity in artistic vision and standards of quality are crucial in a co-development or co-production, as is the need for the management of the respective companies (on the macro-level) and the managers of the project (on the micro-level) to get on with and understand one another.

Even though there is often one 'lead' partner (usually where the project originated), we are dealing with production where elements will be undertaken in two or more locations by a multi-cultural crew, overseen by directors and senior managers from two or more countries. Whilst modern technology and ISDN lines help enormously, it's still about people and creative people at that.

B. Flexible and collaborative approach to financing
A flexible and collaborative approach to financing is also crucial. What do each of you need to make it work?
• In your respective countries (with regard to any grants, soft loans and subsidies)?
• For your respective companies from a business perspective?
• What is each partner prepared to contribute in terms of deficit finance?
• What will be the initial split of rights before you both go out to raise additional finance and what are you prepared to both concede in terms of dilution of equity if a third party is needed to close the gap?
• Are you all agreed on the most appropriate distributor?
• If either can make a direct pre-sale in a major territory (U.K., Germany or France), are the terms acceptable to you both? What percentage of pre-sale in relation to the budget triggers the rest of the finance?
• Which territorial rights will you wish to keep for yourselves -- if any?
• Are you being realistic in terms of what you wish to retain as rights, given the level of third party finance you might require?

2. Find the right project

Make sure that you both "get it" -- i.e. the humour, the pacing, the direction, the target audience, the market you are aiming for. The best projects are those where all the partners are clear on the above and where the characters or concept transcends specific cultural "quirks" and will hopefully touch an international nerve or funny bone.

3. Communicate with one another

There can be no hidden agendas or objectives. It's like a marriage -- if there are problems, they need talking out and resolving; if something the other partner or partners is doing is irritating or unacceptable, it should not be allowed to fester. Be clear about respective roles.

Co-Development and Co-Production -- A Growing Trend
Having read this far, one might wonder that any co-production ever happens! Yet they do in increasing numbers, driven by economic necessity, the need to spread risk and also to increase access to good ideas and material.

It helps that certain broadcasters across Europe are prepared for the right projects, on an albeit limited basis, to invest as co-producers (BBC, ITV, ZDF, Nickelodeon U.K., Disney Channel France, Fox Kids in Europe, Cartoon Network Europe...). However, the burden of raising finance rests more and more on financial producers and distributors and the production companies themselves.

In today's market place, a European animation production company, unless it only wishes to operate on a "work for hire basis," must have financial muscle to develop and co-produce and retain rights, without this it is very vulnerable. The studios which are capable of this have either (i) raised equity investment into their companies from financial investors (ii) are subsidiaries of larger corporations which have financial firepower (iii) have access to the bespoke animation equity investment funds and/or (iv) can access significant subsidy finance.

The European animation industry is tough, but vibrant and growing. In 1999, c. 840 hours of animation was produced in Europe with about 40% produced in France and c. 12% in Germany. This leaves nearly 400 hours being produced elsewhere in Europe. Much of the above 840 hours was produced in co-production of some kind or another and this trend is continuing.

As stated earlier, there is no set formula or template to offer up. I only wish there was, simply because it would make all of our lives and even the writing of this article a lot easier! The numerous co-productions on which we have worked, for example, Oi! Get Off Our Train! (ZDF, BBC, Miramax), Preston Pig (Varga/Link/ITV) and Lisa (Happy Life/Varga/RTL Klub), were all different in structure.

We are currently involved in three more European co-productions, all at varying stages. Of the three, one is based on an original idea developed by us, one is based on an original idea by our co-production partner and one is based on an idea jointly co-developed with another partner. In addition, we are in discussions on two further co-productions (one a European/U.S. collaboration) and in co-development on another two. It is highly probable that there will be little or no substantial grant or subsidy money involved in the final financing of any of these.

It is certain that we and our partners will provide deficit finance in some degree; that we will retain rights in return for this; that we will share net receipts from distribution in the "rest of world" and retain certain territories directly, dependent always, of course, on the deal we strike with a given distributor. If there is a U.K. terrestrial commission we will discount the contract with a bank or consider sale and leaseback if there is no direct cash flowing for production; if a French or German partner is involved we will benefit from subsidies. If not, we will allocate the production work according to who is best suited or has the capacity at the time. Somehow, it will come together and it will work both from a business and a creative viewpoint.

In other words, like most of our colleagues, associates and peers in Europe, we are currently working on, and will continue to work on, making a lot of patchwork "mini-skirts!"

Jan Sawkins, Varga Holdings' Group Managing Director, is a respected international financial and investment executive. Sawkins has an extensive career in international media and finance. Whilst serving with Robert Fleming, the London Merchant Bank, she helped launch TEAM plc, an innovative group of independent production and distribution companies. She later joined TEAM as Joint Managing Director, before forming her own successful consultancy firm. As Group Managing Director for Varga Holdings, Sawkins is responsible for the overall management of the Group, as well as collaborating with CEO Andras Erkel in the areas of strategic planning, contractual negotiations and investor relations.