Kiwi's 54% Gain Leaves New Zealand Paying to Keep `Hobbit' Film

The New Zealand dollar’s 54 percent gain since 1999 almost did to Bilbo Baggins, hero of J.R.R. Tolkien’s “The Hobbit,” what Smaug the dragon couldn’t.

The kiwi’s advance against the U.S. dollar was the main reason behind Warner Bros Productions Ltd.’s threat to move production of its new “Lord of the Rings” prequels away from New Zealand, Prime Minister John Key said last week. In the 11 years since director Peter Jackson first started filming the “Rings” series in the country, the kiwi has soared to 77 U.S. cents from 50 cents, inflating costs for the Hollywood studio.

Key last week promised Warner as much as $25 million in subsidies after the studio demanded incentives to offset the currency’s gain. His offer ensured New Zealand will provide the backdrop to Tolkien’s Middle Earth in the two “Hobbit” movies, nine years after the original “Rings” trilogy finished.

“The big issue for them was the substantial appreciation in the New Zealand dollar,” Key, former global head of foreign exchange at Merrill Lynch & Co. Inc, told reporters after the deal with Warner. “That’s something that a lot of our exporters are struggling with.”

For Key, who also serves as tourism minister, the deal with Warner carries the promise of promoting New Zealand’s tourism industry. The Rings films added about NZ$350 million ($268 million) to the economy in the three years to March 2002, as well as boosting tourism from fans who paid to see the locations where Tolkien’s hobbits battled troops of orcs.

Photographer: Seokyong Lee/Bloomberg

John Key, New Zealand's prime minister. Close

John Key, New Zealand's prime minister.

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Photographer: Seokyong Lee/Bloomberg

John Key, New Zealand's prime minister.

Warner threatened to review the location for “The Hobbit” after a workers’ boycott of the movie was proposed by New Zealand Actors’ Equity, backed by Australia-based Media, Entertainment and Arts Alliance. Paul McGuire, a Los Angeles- based spokesman for Warner, declined to comment.

Threats Mount

The threat was one in a series of holdups for the film. “The Hobbit” also faced delays after the withdrawal of director Guillermo del Toro in May and a fire at a Wellington production studio where parts of the movie were to be shot. Jackson agreed to take over as director.

Metro-Goldwyn-Mayer Inc., co-owner of “The Hobbit” with Warner Bros., stopped making debt payments last year. The Los Angeles-based company filed for Chapter 11 bankruptcy protection today in New York and sought court permission to keep paying its share of production costs.

MGM said in court papers that it plans to spend as much as $125 million on operations in the next 15 weeks, including “The Hobbit,” and has spent some $20 million on the film to date.

Kiwi’s Rise

As the production languished, the dollar rose. New Zealand’s dollar reached a 27-month high against the U.S. currency on Nov. 2, six days after Key agreed to Warner’s terms.

Its surge over the last decade was fueled by a housing boom and rising global demand for commodities which buoyed the country’s economic growth. That spurred the central bank to raise the cash rate to a record 8.25 percent high in 2007, making the currency a favorite of the so-called carry trade.

The New Zealand dollar has been more volatile since the start of the global financial crisis in mid-2007, when it was worth 81 U.S. cents. Since 2008, the exchange rate has been influenced by weakness in the U.S. currency.

“Investment intentions are down,” John Walley, chief executive officer of the New Zealand Manufacturers and Exporters Association, said in a telephone interview about the strong kiwi’s impact. “It’s very painful.”

‘Lot of Money’

Warner executives in Wellington were driven around the capital city in state-owned silver BMWs as Key took personal control of the talks to try to keep the film, which details a quest by Bilbo and his companions to retrieve treasure from Smaug’s mountain lair.

“There’s no question that Warner Bros lost a lot of money while they were mucking around with these issues,” said Key.

Other potential film locations included Scotland, Ireland, Canada, Australia and eastern Europe, Hobbit co-writer Philippa Boyens told Radio New Zealand last week.

To keep the films in New Zealand, Key agreed to pay Warner Brothers extra rebates of as much as $7.5 million per picture, subject to their success, and rush through changes to employment laws for film workers. The government will also pay $10 million toward marketing costs in a partnership with the studio to promote New Zealand as a film and tourist destination.

‘Avatar’ Lure

“The Hobbit debacle has gained a level of visibility for a problem that hard-working New Zealand exporters have failed to achieve,” Selwyn Pellett, founder of the Productive Economy Council, said in an Oct. 27 statement.

To entice filmmakers, the New Zealand government introduced a grant in 2003 that offered overseas studios a 15 percent rebate on production costs above a certain value. That encouraged the makers of “Avatar” to film parts of the movie in New Zealand in 2007, contributing more than $307 million to the economy, according to the Ministry of Economic Development’s website. The government last week widened the grant’s criteria.

“The exchange rate is clearly one factor that the studios assess when looking at different countries,” Gisella Carr, chief executive officer of Film New Zealand, said in an e-mail. “It is just one factor though.”

The Rings trilogy inspired a host of New Zealand-wide tours where fans can experience Jackson’s vision of Tolkien’s fantasy world, including a four-day, NZ$5,800 tour of some of the 150 locations used in the films.

In the North Island’s Matamata region, tourists can visit the site of Jackson’s village of Hobbiton, where Ian McKellen’s wizard Gandalf enlists the help of Frodo, played by Elijah Wood. While the original film set has been dismantled, 17 of the 37 hobbit holes still exist, according to the Hobbiton Tours website.

“The Lord of the Rings presented New Zealand to the world in a truly spectacular way,” Suzanne Carter, a spokeswoman for Tourism New Zealand, said in a statement. “The Hobbit provides us with another great opportunity.”

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Iain Wilson at iwilson2@bloomberg.net

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