Czech privatization: the case of Filmove Studio Barrandov.

• Author: Millea, Michael
• Position: Privatization: Political and Economic Challenges

Introduction

In 1991, when the former Czechoslovakia was carpetbagger heaven, I went to Prague as a privatization advisor under the auspices of the U.S. Agency for International Development.(1) My primary activity during an 18-month period was to lead a team advising the management of Filmove Studio Barrandov, the country's largest film studio, on the studio's privatization, which Barrandov's management hoped to accomplish through the sale of the studio to a group of investors known as Cinepont. Much of my work as an advisor centered around the issue of valuation, since it was in the interest of the Czechoslovak government to sell the studio at a fair price. Although the privatization of Barrandov presented a wide range of issues particular to the rarified backdrop of the European film industry, I believe that most of the problems encountered were common to privatizations across a broad range of industries in Eastern Europe at the time.

The issues raised during Barrandov's privatization fall into three broad, and occasionally, overlapping categories: (1) the information required to value the enterprise subject to privatization; (2) the impact of governmental and legislative initiatives on the value of the enterprise; and (3) the objectives and management of the privatization process. The first category addresses gaps in vital information and the lack of predictability regarding the enterprise. These problems were all too common in centrally planned economies that were thrown into disequilibrium by sweeping changes in policy. The second category addresses the changing legal and regulatory environment in which wide-scale privatization occurs. The third focuses on the tensions that may arise between the privatization advisor, the government that owns the enterprise to be privatized, the existing management of the enterprise and, on occasion, competing advisors.

After a brief discussion of Barrandov and its history, this article will discuss some of the issues in each of these categories as they arose during the film studio's privatization. The article concludes with a brief survey of events at Barrandov since its sale to Cinepont in 1992.

History of the Filmove Studio Barrandov

In 1991, Barrandov was the largest film studio in Czechoslovakia and provided a full range of production services to the Czechoslovak and international motion picture industries, as well as the television programming industries. Among the production services provided by Barrandov were the rental of sound stages and camera equipment and the provision of props, costumes, and sets. The studio also produced feature length films for domestic and international theatrical release, and owned a film library of approximately 350 titles. Through a sister company, Film Laboratories, Barrandov provided its clients with motion picture film processing services. Barrandov's activities can be placed in an appropriate context through a brief primer on the film industry.

The business of films involves three broad functional categories of activity: production, distribution, and exhibition. Production involves the actual making of the film; it encompasses the development of a script, the close of principal photography (the actual shooting), and the editing of a final cut. Film production is a risky business in which even successful producers often have a volatile record of hits and misses. Distribution involves contracting with exhibitors to show the film, producing and delivering prints, and advertising the film. Most U.S. film studios are involved in both production and distribution, although over the years they have found ways to reduce many of their traditional production costs. Major film studios typically have large film libraries that produce enough cash flow through rentals and royalties to cover studio overhead. Exhibition involves the operation of movie theaters, where the film is screened before a paying audience.

Barrandov was involved solely in film production, the rental of studio space, and the provision of production services to outside producers. Under state ownership, motion pictures produced by Barrandov were distributed through three Czechoslovak distributors: Lucerna Film, which had a monopoly on film distribution in the Czech Republic; Slovenska Pozicovna Filmov (SPF), which had a similar monopoly in Slovakia; and Film Export, which was the exclusive distributor of Barrandov films internationally. Following the 1989 Velvet Revolution, newly-formed distribution companies, the largest of which was Interama (a company founded by former employees of SPF), emerged to compete with these former monopolies.

Barrandov's production facilities were located approximately 15 minutes by car from the center of Prague. They occupied about 600,000 square meters of land and featured seven soundproof studios in four separate buildings covering an area of approximately 7,000 square meters. The studio was founded in 1931 by Milos and Vaclav Havel, the uncle and father, respectively, of President Vaclav Havel. During the 1930s, the studio developed an international reputation, producing such films as the classic Extase, which featured the young Heddy Lamarr in a nude bathing scene, thereby exciting great scandal and, not coincidentally, launching her Hollywood career.

When the Nazis occupied Czechoslovakia in 1938, they expropriated the studio for use in the production of propaganda films. In 1945, Presidential Decree Number 50 nationalized the Czechoslovak film industry and Barrandov became a state-owned company.(2) Between 1948 and 1989--with the exception of a single, brief interval during the Prague Spring of 1968--the studio produced the sort of inspirational proletarian dramas that end with the heroic comrade kissing his tractor and chugging off into the sunset. During the Prague Spring, a period of relative creative freedom, Barrandov hosted a number of talented writers and directors and produced such notable films as Jiri Menzel's Closely Watched Trains and Milos Forman's Loves of a Blonde.(3)

The collapse of communism ended the large governmental film subsidies averaging $5.9 million per year, which had supported much of the production at Barrandov. In 1990, with the studio on the verge of bankruptcy, a group of writers, directors and other creative artists employed by the studio asked Vaclav Marhoul, a producer who had led an anti-communist strike committee at Barrandov in 1989, to head the studio's management. A year after assuming his position, Mr. Marhoul had reduced Barrandov's work force from 2,700 workers to approximately 1,000. During this period, the studio's total revenues declined sharply from $22.6 million in 1990 to $11.3 million in 1991 largely due to a decrease in demand by foreign film producers for studio space rental and production services, which in turn was due to a recessionary climate in the United States.(4) Domestically, the studio went from producing approximately 24 Czechoslovak films in 1989 to approximately six in 1991.(5) Under the new regime, Barrandov derived its revenues and profits largely from its film library (a royalty stream of $1.7 million per year in 1990), the rental of studio space to foreign film productions ($16 million in 1990 and $3.9 million in 1991) and production of advertising and television programming.

In 1991, the newly-elected conservative government headed by Vaclav Klaus decided to privatize Barrandov. Upon the heels of that decision, our team arrived at the studio.

The Valuation Process

Our team was assigned three offices in Barrandov...