Future Looks Blurry for Panavision

Nine out of 10 Hollywood blockbusters end with the same three words: “Filmed in Panavision.�

In the 40 years since Panavision lenses were first affixed to movie cameras, the Woodland Hills-based company has become the tool of choice for top filmmakers worldwide.

Its inventory of precision equipment is unrivaled. Its brand strength remains essentially unchallenged.

But over the last year, Panavision Inc. hasn’t performed like an industry leader. Quarter by quarter, it continues to lose money. Last fiscal year the company posted a $55-million loss.

A downturn in movie production, a movement away from big special-effects films (which require more cameras) and excitement over new digital technologies are formidable obstacles for Panavision.

Investors have been pessimistic as well, with Panavision’s shares tumbling from $28 a year ago to around $8 today..

But one investor, a big one, has not lost hope. Last year, Ronald O. Perelman, chairman of Revlon Inc., marauder of Wall Street, upped his stake in Panavision to 91%. He plans to increase the company’s already impressive market share and develop cutting-edge movie cameras.

But did Perelman come to the rescue at the wrong time? Can Hollywood’s No. 1 camera supplier be made profitable during an industrywide slump? And, beyond that, can Panavision, a company that has been reluctant to embrace video to focus instead on good old-fashioned reel-to-reel film, survive the onset of the Digital Age?

Some are skeptical. Panavision’s business is too narrow and too reliant on film technology, said Randal Roth, an equity analyst at Renaissance Capital Corp. in Greenwich, Conn.

And Perelman’s management style, especially his pattern of borrowing heavily on his companies before selling them, makes Panavision an even risker bet, Roth said.

“When people around here mention Ron Perelman,� he said, “we head for the door.�

Panavision executives concede that business is worse than they expected, but they say they are well-positioned for the future because of efforts to expand the company’s market domination and a new venture into digital cameras.

“We’re a stronger company today than we have ever been,� said John Farrand, Panavision president and chief executive. “Every time I pick up one of our cameras, I realize our product keeps getting better, sturdier, even sexier, I’d say.�

At the company’s camera lab in Woodland Hills, technicians in white lab coats with stethoscopes around their necks probe the steel hearts of Panavision’s latest movie cameras. They are making sure there’s not one squeaky bearing, one loose part among the thousands. After the stethoscope test, they cradle the cameras into padded rooms to probe electronically for any trace of noise.

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The movie camera business may not be the sexiest side of Hollywood, Farrand’s comments aside, but it is one of the most precise. And Panavision, with revenue of $193 million in 1998, is renowned for obsessive technicians, a quality product and the world’s largest array of movie-making equipment--1,000 cameras and 6,000 lenses.

The company began in 1954 when camera store owner Robert Gottschalk jury-rigged a wide-screen projection lens. Two decades later, Panavision unveiled a lightweight high-quality 35-millimeter movie camera--the Panaflex--soon to become an industry favorite.

Today’s Panaflex models, chock-full of computer chips and even a heater to keep the film warm, rent for $1,500 a day, without the lens.

As Panavision’s market share has widened over the years, its brand has taken on a mystique.

“It’s like you’ve arrived as a DP [director of photography] when you turn to Panavision,� said Thomas Schweickart, a manager at Birns & Sawyer, a Hollywood camera shop.

In 1998, 86% of episodic TV shows were shot with its equipment, Panavision says, as well as 71% of feature films. That figure reached 90% for high-budget blockbuster movies.

The leftovers go to European camera makers Arriflex and Moviecam, who have carved out niches in Panavision’s shadow.

Arriflex, a German company, makes what is widely regarded as the industry’s best slow-motion camera, along with other products. Moviecam, an Austrian firm, sells the lightest 35-millimeter camera on the market, perfect for the jittery hand-held shots that MTV made famous.

This summer, Panavision will launch its smallest 35-millimeter camera ever, to compete with Moviecam.

Panavision differs from its competitors in a strategic way that goes beyond the currency of its golden name. The company controls the entire camera process, refusing to sell cameras to anyone, including suppliers. Instead, Panavision markets, rents and services its line of equipment through a worldwide network stretching from Southern California to Sydney, Australia.

The wide net Panavision has cast has partially sheltered it from the runaway production costs wreaking havoc on Hollywood. While the action movie “The Matrix� was made in Australia, it was shot with Panavision equipment supplied by the company’s Sydney office.

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Canada, with its government incentives and attractive currency exchange rate, has become a choice location for movie makers trying to shave costs. Panavision has offices in Montreal, Toronto and Vancouver.

But there’s no getting around the fact that fewer movies are getting made around the world, and Panavision, along with the rest of the entertainment industry, is being squeezed.

Last year, the number of wide domestic releases slipped to 139--from 151 in 1997, according to A.C. Nielsen EDI film tracking service. And studios are shying away from big-budget “event� movies, including those loaded with special-effects shots that require more than the standard two-camera package.

“The number of film starts is less than we projected,� said Farrand, who has been an executive at Panavision since 1985. “There’s no doubt that is hurting us.�

Enter Perelman, the New York tycoon who always seems to have a new company in his sights and a supermodel on his arm. Perelman, who is estimated to be worth $6 billion, consolidated his control of Panavision just as the entertainment industry was hitting a slump.

In June 1998, in a complex recapitalization that left the company with a $58.7-million accounting charge on the books, Perelman bought out another Wall Street player, Warburg Pincus, completing his 91% ownership stake in Panavision.

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How does Perelman plan to turn Panavision into a moneymaker? The company lost $6.1 million in the first quarter ended March 31. And the movie industry is expected to have an off year in 1999.

Perelman was not available for comment. He is a busy guy these days, ensnared in a messy divorce and searching for a buyer for the jewel in his name-brand crown--Revlon cosmetics.

Executives at MacAndrews & Forbes, Perelman’s holding company that owns Panavision, say the camera maker is a long-term investment. As a result, management is focusing less on net income, which has been decreasing, and more on cash flow, which is growing, thanks to acquisitions in Europe and widening market share.

Perelman can weather short-term losses because of the way he intertwines his investments through larger holding companies, some analysts say. At tax time, he can offset profit at one company, such as Revlon, against losses at another, such as Panavision.

Perelman’s track record in Hollywood is mixed. Although he prospered handsomely from buying and selling Technicolor and New World Communications Group, shareholders suffered badly from his takeover of Marvel Entertainment. He borrowed heavily to buy the comic book publisher in 1989 and soon took it public, only to have the business collapse and file for bankruptcy protection. Perelman, however, walked away with $50 million in profit.

There’s no clear consensus how Panavision will fare under Perelman’s stewardship.

The company’s newest venture is a project with Sony to design a digital camera system for George Lucas’ next “Star Wars� installment, to be shot in the spring of 2000.

Much of the filmmaking process, such as editing and sound mixing, has already gone digital. But Lucas’ project will be the first grand-scale test of digital images and possibly the beginning of a different, more difficult era for companies like Panavision whose core business is based on film.

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Panavision executives say that just because digital becomes a viable medium doesn’t mean that 35-millimeter film will go the way of the vinyl record.

“We see the two technologies coexisting,� Farrand said.

And even if digital does become dominant, Farrand said, Panavision’s expertise in lenses and other imaging equipment can be transferred to digital cameras with the help of a partner like Sony.

Before buying Panavision, MacAndrews & Forbes thought hard about the company’s future in a digital world.

“We didn’t want to find out that we had a buggy whip the second day we bought the company,� said Jim Maher, the holding company’s president.

“And we concluded that Panavision is in a good position to deal with the change to digital. It’s not so much the camera itself, but the fine-tuning of the camera, having it available and getting it prepped, that matters in this business,� he said.

“That happens to be the niche that Panavision owns.�

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Filmed in Red Ink

The production slowdown in Hollywood has hurt Panavision’s bottom line. Quarterly earnings and losses, in millions:

1998, 2nd quarter: $56.6 million*

1999, 1st quarter: $6.1 million

*Loss due in part to one-time compensation and options charges.

Source: Panavision