Monetizing the Celebrity Meltdown
Tom Barrack, a billionaire investor who made his fortune in real estate, has discovered a market in distressed celebrities. With Neverland Ranch and Miramax under his belt, he’s now on a shopping spree—and bringing along his buddy Rob Lowe.
By Benjamin Wallace Published Nov 28, 2010
(Photo: Ramona Rosales)
You’ll see why Michael called this place Neverland,” says Tom Barrack, the newest owner of Michael Jackson’s Neverland Valley Ranch. Barrack is a 63-year-old billionaire with a gleaming shaved head, summer-in-Sardinia tan, personally trained muscles, and sockless tasseled loafers. He is sitting on the lawn beside the Tudor-style, panic-room-equipped main house, near a gnarled oak tree with steps winding up to the perch where Jackson wrote Bad.
This, the manicured park with the giant floral clock and movie theater featuring isolation boxes for immunocompromised children—default B-roll for all TV coverage of Jackson—comprises just 32 acres. It scarcely hints at the grandeur of the full property, which is nearly ten times that size, with 67,000 oaks and sycamores, the odd rattlesnake and mountain lion, and a former Chumash Indian worship site overlooking a savannah-like plain. “You’ll feel something, which I think was what drove him,” Barrack says of the Chumash site. “And I don’t mean that—I’m not coming from outer space—but you will actually feel it, I promise.”
When Barrack’s private-equity firm, Colony Capital, took over Neverland in November 2008, averting foreclosure, even the groomed portion was going to seed. Jackson, self-exiled after his child-molestation acquittal to places like Bahrain and Las Vegas, hadn’t been home since early 2005. His 275 employees had dwindled to four. The amusement-park rides and steam train—operable only by California’s single licensed steam-train engineer—had been sold off to raise money. The petting zoo’s animals had been removed by animal-rescue groups; the snakes from the reptile barn were, um, released into the wild.
Since then, Barrack’s team has worked steadily to rehabilitate the estate, refinishing the wood floors, relandscaping acres of grass, introducing more swans into the lakes, and repositioning Jackson’s statue of a long-gun-brandishing pirate to scare off coyotes. In the dance studio, a solitary bulb lights a spot worn down by Jackson’s spinning. The elephant barn now houses a labyrinth of walls filled with effusive notes penned by visitors from around the world. The only obvious reminders of Jackson’s complicated legacy are the bronze statues of children at play that dot the estate.
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Barrack built his fortune making deals, and in some ways, Neverland began as just another one—a contrarian bet on a troubled asset, an operating business backed by real estate. Only in this case, the operating business was a person. Colony would bail Jackson out of his substantial debt; in return, the firm would assume ownership of Neverland, and Jackson, after a thirteen-year hiatus, would go back to work to generate new revenue. Jackson’s death, before he could carry out a planned comeback tour, turned the transaction into more of a straightforward real-estate play: Colony is fixing up Neverland and plans to sell it, at some point, for a profit. But after doing the Jackson deal, Barrack and his team began to wonder whether they might have stumbled on a whole new class of investment: the distressed celebrity.
Earlier this year, two financial firms, Cantor Fitzgerald and Media Derivatives, moved to create futures exchanges devoted to betting on film box-office receipts. Neither plan made it through Congress, which was heavily lobbied by Hollywood studios, but these would-be speculators weren’t alone in seeking a new way for Wall Street to enter the cultural marketplace. Earlier this fall, CAA sold a 35 percent stake of its agency to the private-equity firm TPG, modeling the deal on Ted Forstmann’s purchase of IMG in 2004. And while there have always been moneymen willing to buy a stake in the big studios, along with a deep bench of bored tycoons eager to “executive produce” their way into hanging out on set, Hollywood is now luring harder-nosed investors backing individual movies in the full expectation of an attractive return on equity.
Other investors have sought ways to take positions in celebrities themselves. Thirteen years ago, David Bowie famously raised $55 million by issuing so-called Bowie Bonds, paying 7.9 percent interest through album royalties and introducing the concept of securitized intellectual property. Now the model is proliferating. In 2007, Mark Cuban co-founded Content Partners to do for celebrities what structured-settlement firms do for winners of lotteries and lawsuits: pay an up-front lump sum in return for the right to future revenue. (Cuban won’t name names but claims the venture has been “highly profitable.”
Art Capital Group, a high-end pawnshop, lends money to brand-name artists who pledge their paintings and photographs as collateral.
Over the past two years, Barrack has been lining up deals that target celebrities and entertainment properties whose value he believes to be artificially depressed. In some cases, that’s because they haven’t yet figured out a way to monetize their assets. But mostly it’s because the investment is, in the classic sense, distressed—individuals like Jackson or Annie Leibovitz whose financial mismanagement has obscured their future revenue potential, or properties like the Miramax film library, which Disney is unloading at a time when no one can agree on what a studio archive is worth. This summer, Barrack created a new $500 million media-and-entertainment investment fund, working with his friend Rob Lowe, who is a partner in the fund. Together they have been on something of a shopping spree—and generating a little tabloid coverage while they’re at it. In one TMZ appearance, a paparazzo’s telephoto captured Lowe and Barrack, shirtless, checking their BlackBerrys on a yacht in the Mediterranean. In a second, the two men were video-ambushed as they entered the Mayfair restaurant C London for dinner with owner Giuseppe Cipriani and Formula One’s Flavio Briatore.
Barrack has explained the timing of his new direction by musing publicly that some of the investment sectors in which he amassed his wealth can no longer generate extraordinary returns. The world right now is “an environment that has very little visibility, and whatever you guess will surely be wrong the next day,” he says, glancing at his BlackBerry. “Everybody has been abjectly wrong if they’re trying to make macro bets.” The only thing to do is position yourself for opportunities—stand in the stream and wait for fish to swim between your legs. That’s how the Neverland—
“Face!” Barrack yells suddenly, looking in the direction of Neverland’s front gate. “Face!”
Barrack's Bailouts
Recent investments by Colony Capital.
Neverland Valley Ranch, 2008
Annie Leibovitz, Spring 2010
Miramax, Fall 2010
Photos: Gabriel Bouys/AFP/Getty Images (Neverland); Mario Tama/Getty Images (Leibovitz)
Rob Lowe, 46 years old and agelessly pretty in Chrome Hearts sunglasses and a light-blue Zegna polo, is walking toward us. Barrack awarded Lowe his nickname after they entered a Starbucks in London this past summer and were greeted by a swooning Croatian fan: “Ze face! It’s ze face!”
“We needed some star power,” Barrack says, as Lowe reaches us, grinning.
“How’s the hand?” Lowe asks.
Barrack is wearing a red cast on his left hand. Three days ago, he was playing polo at the Santa Barbara Polo and Racquet Club against a team that included Adolfo Cambiaso, the best player in the world, when his horse went down. Barrack broke his thumb and tore his rotator cuff.
“I’m great,” he answers.
Barrack is almost comically stoic in the face of injury. He reentered the match. In college at USC, where he played on the rugby team, he went into the finals against Stanford with a broken nose; by the end of the game, he also had a broken left ankle, separated shoulder, and torn right knee. In the years since, he has continued to rack up injuries. He has separated his clavicle more than once, and his right bicep hangs balled near the elbow, from a tendon severed in a different polo incident. “I don’t view it as recklessness,” Barrack says. “I view it as the mental discipline to practice pushing through comfort barriers.”
In 2005, Barrack’s grin appeared on the cover of Fortune, beside THE WORLD’S GREATEST REAL-ESTATE INVESTOR, and he got there largely by relying on this maniacal stamina. He launched Colony Capital in 1990, and for fifteen years, it averaged an annual return of 21 percent for its investors. The inaugural Colony transactions mined the S&L crisis by buying packages of bad loans from the FDIC at bargain prices. These deals possessed several of the elements that would characterize Barrack’s deals over the next two decades: They used real estate as collateral; they required intensive hands-on management; and, most important, they ran toward, rather than away from, regulatory complexity. Colony was the first private-equity firm to get a gaming license, for instance. “No one—no one—would go through that Bataan death march,” Barrack says. “So for four years, we had a monopoly, because there’s no other private-equity firm that would go through the licensing process, which is hell.”
When Barrack and Lowe announced this past summer that they were joining forces to start their entertainment-investment fund, it seemed an unlikely May-December bromance. But the two have been friends for a decade. Lowe’s and Barrack’s children attended the same grammar school. Since meeting as parents, the two have surfed in Indonesia and spent Christmas together in Hawaii; Barrack is the only person Lowe has allowed to read portions of the memoir he’s writing, Stories I Only Tell My Friends.
To be a billionaire in California is to have some relationship to Hollywood, and Barrack’s appears particularly freighted. The son of a grocer, he grew up in Culver City in the shadow of MGM Studios. By fourth grade, he had made a deal with the lady overseeing the Red Riding Stable, which served as MGM’s barn; if he cleaned eight stalls a day, he could ride one of the rental horses for three hours. “I became very good at mucking stalls of the horses of the stars,” he says.
Though an investment banker on the losing end of one of Barrack’s deals snarks that “he’s a star-fucker,” Barrack dismisses the suggestion that his childhood shovel work might somehow explain his current forays into entertainment. If anything, his friendship with Lowe has been good business. Barrack had been present on several occasions when Lowe was on the phone negotiating final points of contracts, and was perplexed by the irrationality of Hollywood. He and Lowe started talking about whether the inefficiencies of show business presented an investment opportunity.
“In my business, nobody ever tells you what the numbers are,” says Lowe. “There can be 50 different numbers, and I’ve never been part of a deal in the last ten years, for any project I’ve done, that didn’t come down to the one-yard line and then somebody going ‘**** you’ and the other side going ‘Hey, **** you’ and then overturning the table, and then maybe one of the parties comes back and then the deal happens. And Tom just can’t believe this. And so when it gets to the one-yard line, inevitably they call me, and then at that point, the real negotiation begins.”
Barrack’s turn into entertainment investing began with a visit to Michael Jackson’s home in Las Vegas in 2008. Barrack had received a call from Tohme Tohme, a fellow Lebanese-American who had become Jackson’s business manager. Jackson hadn’t released an album or toured in thirteen years, but he had three significant assets: the Neverland property, the MiJac catalogue of his own music, and the enormous Sony/ATV catalogue, which included, among other songs, most of the Beatles’ oeuvre. Jackson was facing a crisis, Tohme said. The holder of $270 million in loans to Jackson was foreclosing on Neverland and planned to sell it in five days. Would Barrack meet with Jackson? “It’s so not Tom’s thing,” Lowe says. “Getting roped into spending half an hour with Michael Jackson in some weird house is just not on his agenda.”
Somewhat grudgingly, Barrack arrived at Jackson’s fifties stucco rental on Palomino Lane. “Not one blade of grass,” Barrack says. “The house was old and musty.” The 1,000-plus-page Sony/ATV catalogue was on the table between them, and Barrack was quickly won over. “For sure, the guy is an absolute genius,” Barrack says. “He was remembering not just songs but every performance, every date, every script.” When it came to business matters, though, Jackson was lost. He knew only that if Neverland was foreclosed on as scheduled, it would trigger a cascade of financial devastation. For the past decade, he had repeatedly staved off financial reckoning by borrowing. Now he was out of options.
As a rule, Barrack is drawn to distressed situations. One of his rules for success.
Barrack had a relationship with the loan holder, Fortress, and was able to get an extension to give his Colony team time to crunch the numbers. They concluded that the only way to make a deal work would be for Jackson to start generating new revenue, which meant performing old material. Two days later, Barrack called Jackson. “I told him: ‘Where you are is an insolvable puzzle unless you’re willing to go back to work. If you’re willing to do that, then we can help, but if you’re not willing to do that, it’s just presiding over a funeral.’ ” At first, Jackson demurred. “He really had a hard time with that, and he struggled for about three days. Finally, he calls back and says, ‘You’re right, I’ll do it.’ ”
Colony agreed to bail out Jackson; in return, the firm would take ownership of Neverland and arrange for AEG, the concert promoter owned by Barrack’s friend Phil Anschutz, to stage a comeback. An unforeseen complication arose when Barrack received a call from the King of Bahrain, whom he knew from Sardinia, where Barrack owns much of the Costa Smeralda; astonishingly, Jackson had apparently forgotten that while being hosted in Bahrain, he had signed over the rights to his catalogue to the king’s son. Colony had to buy out that interest. Jackson moved into a gated $100,000-a-month mansion in Bel-Air to prepare for a run of 50 concerts in London that would relaunch his career. Instead, it ended it. He was struggling physically and heavily medicated by a live-in doctor. He died, from a sedative overdose, eighteen days before the first concert.
But in the frenzy of posthumous adulation of Jackson—in those first days, it was hard to find an FM radio station that wasn’t playing “Billie Jean” or “Beat It”—Barrack watched as Jackson’s value was suddenly and spectacularly realized. This Is It, a documentary about Jackson’s preparation for the comeback concerts, grossed $261 million worldwide during its theatrical run, a record for a concert film, and the Jackson estate signed a series of lucrative deals, including a video game and a Cirque du Soleil show.
“What’s amazing,” Barrack says, “is he attained in death what he could never attain in life.” It may be an obvious observation, but it’s one with huge financial implications for a long-term investor. Anyone who had seen past the momentary distractions of controversy and scandal could have identified the intrinsic preciousness of Jackson’s talent and fan base. Colony hadn’t predicted Jackson would die, of course, but it had wagered correctly that, over time, Michael Jackson the asset would outshine its liabilities (and even Michael Jackson the person).[/B]
As a rule, Barrack is drawn to distressed situations. One of the adages in a list of “rules for success” that he sometimes distributes to employees is “befriend the bewildered.” And when you start applying the thought process of a vulture investor to pop culture, suddenly the world can seem dizzy with opportunity. Is Lindsay Lohan a drug-addled train wreck or an underestimated future cash machine? What about Mel Gibson? Rob Lowe himself, now a ubiquitous television star, would have made for a profitable distressed investment if Rob Lowe shares had been floated in the late eighties. It’s all a matter of correctly analyzing an asset’s fundamentals and buying at the right time.
Not long after Jackson’s death, Barrack read that Annie Leibovitz had taken out a $24 million loan from Art Capital, putting up four homes and the rights to her catalogue as collateral, and that Art Capital had sued her after a series of missed payments. It was 7 a.m. in Los Angeles, and Richard Nanula, a Colony principal, was playing golf at the Malibu Country Club when Barrack e-mailed: “Can we help her?” Nanula met with Leibovitz in New York, and Colony ended up buying out Leibovitz’s debt for $40 million. Leibovitz got the rights to her photographs back; in typical Colony fashion, her real estate would serve as the collateral on the new loan. And Barrack’s firm would work with her to generate new revenue through exhibits of her work and the sale of limited-edition archival prints.
“The very first thing Tom said to me was that he wasn’t interested in my real estate or my archive,” Leibovitz says. “He was interested in me.” Whereas her previous lender was set to make money foreclosing on a loan gone bad, Barrack saw profit potential in facilitating a longer-term turnaround. Comparing Colony with Art Capital, Leibovitz says only: “There are no equivalences. None.”
Barrack says he no longer believes real-estate investing can deliver more than “singles and doubles.” In fact, it has yielded some strikeouts: A $4 billion Colony fund raised in 2007 showed 60 percent losses as of the first quarter of 2010. Meanwhile, Barrack says Colony is fielding “hundreds” of inquiries by cash-squeezed artists and celebrities who hope he can do for them what he did for Jackson and Leibovitz. “It’s the most inefficient quagmire of opportunities I’ve ever seen, financially.”
In flirting with pop culture, Barrack is navigating a world that has tripped up many an otherwise savvy investor, and the next few years will test whether he’s a Hollywood savant or just its latest victim. In early July, he wrote a rhapsodic memo to his employees announcing a “personal breakthrough.” After a meeting scheduled to take place on a yacht in Turkey was canceled, he found himself twiddling his thumbs at sea. “I didn’t know what to do, and I’m not good at being alone,” he says. He ended up reluctantly reading the only book on the boat—Twilight—and then the next two books in the series. In his letter, loaded with disclaimers about how almost disgusting he had found it to contemplate reading a book for teenage girls, he chalked up the book’s broad appeal to Edward’s canny grasp of gender. “Every woman longs for the anticipation, the romance, the journey, the taboo, the patience, and the attentiveness,” Barrack wrote. “Men, however, are all about the destination, the result, the speed, and the outcome.”
Barrack meant his essay as a small parable about the value of exposing oneself to new ways of looking at things, but after it was accidentally posted online and blogged about by The Wall Street Journal, Bella’s legions seized on it as a tribute to their heroine. Twilight blogs went crazy, and mail started flooding in from appreciative teenyboppers everywhere, from Sweden to China. “I swear to God,” Barrack says, “it’s the most embarrassing moment of my life, because you know, for a man, I didn’t mean it as a sensitive moment. I meant it because what I realized about myself was these things that I was sure of—these points of view that I had held that I was so rock-solid about—when I took the time to go to the other side, it unwrapped me.”
At the same time that vampires were eating his brain, Barrack was wondering what his putative media-entertainment fund’s first deal should be. Disney had been looking to sell Miramax for months, and until recently, it had looked as if founders Bob and Harvey Weinstein were going to buy it back with the help of investor Ron Burkle. Then, suddenly, Disney terminated talks, after the Weinstein-Burkle group dropped their bid from $625 million to $575 million. “You don’t hondle Disney,” explains someone close to the negotiations.
Colony’s Nanula, who had been Disney’s CFO when the company first acquired Miramax, liked the deal: It was a library to exploit, a hard asset immune to the vagaries of Hollywood egos. And as it happened, Disney was now in exclusive talks with another Barrack friend, construction tycoon Ron Tutor, who was looking for a co-investor. Nanula took charge of the negotiations for Colony-Tutor, since he had literally hired the people at Disney he would be across the table from. The Colony-Tutor team ended up agreeing to pay $610 million ($662 million before adjustments), with a conservative one third in equity. That represented only four times cash flow, and Miramax came with $250 million in blue-chip receivables. Best of all, there was no money-sucking, roll-the-dice studio attached. Nor were there any Weinsteins. “We saw value where others did not,” Barrack says.
“They overpaid by a mile,” snipes a rival bidder. “Film libraries are melting ice cubes. You’ve got to find a way to re-create revenue streams, which means making films, which means risks.” While Barrack understands that at some point, the library will need to be refreshed, his focus is on maximizing distribution of its existing content. As he sees it, the archive is less a depreciating asset than one for which the new-media turbulence poses an opportunity. The Colony-Tutor purchase is set to close later this month, and both Google and Netflix are already eyeing a digital-rights deal for the Miramax archive.
To fully harvest the library, Colony envisions possibilities including a Miramax cable channel, a Miramax night on another cable channel, a Miramax.com, a video-on-demand Miramax channel, even, one day, a Miramax studio. The Weinstein brothers were not happy to lose out to Barrack and Tutor, and because they retain sequel rights to six films in the library, including Scream and Spy Kids, they could potentially make life more difficult for Colony. Both Barrack and Lowe have received agitated phone calls. “Harvey was frustrated,” Barrack says, “because his parents’ names were on the wall.” (The brothers had named the company after their parents Miriam and Max.) “He sold that name and put a couple hundred million dollars in his pocket, and we had nothing to do with that decision, so you can’t blame us. On an ongoing basis, he is an incredible talent, and we would love to do something with him.”
Colony plans to do more deals in the movie business—perhaps rolling up other film libraries, such as Lionsgate’s—and in other entertainment sectors. It is looking at private TV channels (such as the New York Yankees channel), at European soccer teams, at sports stadiums, at structured-settlement types of royalty deals. Over the summer, Colony signed a deal with the yoga master Bikram Choudhury to help him transition his thousands of “authorized” studios to a franchise model.
But such deals can only be done one at a time. “The benefit and the detriment of that business, whether it’s Michael Jackson or Annie Leibovitz, is each one is so personalized,” Barrack says. “It’s a crafted investment, a venture-capital investment. It’s investing in talent that has been inefficient; by giving them a different set of clubs in the bag, you’ll make them efficient and take the arbitrage.”
All of this non-real-estate activity has at least a few of Colony’s 650 investors a bit unsettled. “I don’t like it,” says a longtime Colony investor of the Miramax purchase. “Just because you’re good in one thing doesn’t mean you’re good in everything. And what I don’t like most is that he’s not in full control. The risk in that deal is not the deal; the risk is in how well Barrack and Tutor get along.”
Nanula is well aware of the perils of dilettantism, and says that any new production would likely come later, as sequels or remakes of films already in the library, and be produced on someone else’s dime. “I think it’s a bit of a gamble,” acknowledges Richard Blum, the San Francisco investor (and husband of Senator Dianne Feinstein), who is putting money into the deal. “But part of what I like are the partners. It’s not like buying Treasuries, but I think these guys have a formula for success.”
After we drive to Barrack’s nearby ranch for a tour (vineyards, stables, two regulation-size polo fields), Lowe leaves for a night shoot in Big Sur. Barrack wants to have dinner in Santa Monica, so we take a helicopter up the coast. At Capo, we’re joined by Laird Hamilton, probably the world’s best big-wave surfer, and his wife, Gabrielle Reece, the professional volleyball player. Hamilton and Reece are the California dream incarnate, blond and buff and bluff. He’s six-foot-three. She’s taller. The couple divide their time between Malibu and Hawaii, where Hamilton grew up. Hamilton greets us with a nod and a quiet “aloha.”
Barrack, who has surfed since he bought his first Dewey Weber board for $15 as a teenager, got to know Hamilton after cold-calling him to speak at his annual investor conference. “He’s not all fogged up like all the financial guys and the guys on Wall Street,” Barrack had told me earlier. “I was always groping to convey to these investors how difficult it is to analyze risk. And Laird just hit the ball out of the park. His philosophy of life applies to everything.”
Hamilton reciprocates the admiration. “It took me about half a second to know that Tom is a good man,” he says. “It’s part of being in touch with your animal side. You just know—looking eyeballs.”
Over dinner, there’s much talk about surfing and fitness and protein-smoothie recipes. Hamilton is famous for his grueling, inventive regimens. Last week, he worked out Barrack and Lowe in the Neverland pool, having them hold twenty-pound dumbbells, sink to the bottom of the thirteen-foot-deep end, squat, explode upward to the surface, gasp for air, and repeat. Tomorrow, he and Barrack will run on the beach, pulling railroad ties behind them.
Hamilton recommends a book he’s reading, Deep Survival; parenting and other wisdom is exchanged. “The man with the sickle doesn’t discriminate,” Hamilton says.
Does Hamilton ever ask Barrack for advice?
“The beautiful thing about Laird and Gabby is our relationship started out agendaless, and we’re both really careful trying to keep it that way,” Barrack says. “And they’re really good on the financial things. They don’t need my financial help.”
“Okay, now he’s going too far,” says Reece, who at least for now is not in any evident distress. “If we had something really serious, we’d feel like we could go there.”
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