China’s Money/Hollywood Tie-up, is it Over?
$VIA, $AMC, $BABA
Billions of USDs have been thrown into question as Chinese regulators crack down on overseas investments,
Paramount’s, a unit of Viacon (NYSE:VIA), backer skips a payment, and both President Trump and some Democrats have taken a protectionist stance.
For almost 5 years, Hollywood has been bolstered by cash from China in the form of surging box-office revenue and multi-billion-dollar investments in studio slates and independent film companies.
The most high-profile pacts have involved some of the biggest brands in both China and Hollywood led real estate giant Dalian Wanda, which bought Legendary Entertainment for $3.5-B in Y 2016 and owns leading US cinema exhibitor AMC Entertainment (NYSE:AMC), Internet giant Alibaba (NYSE:BABA), which in October took an equity stake in Steven Spielberg’s shingle Amblin; China Media Capital, which owns part of Brian Grazer and Ron Howard’s Imagine Entertainment; and Fosun, financiers of Jeff Robinov’s Studio 8.
With a largely stagnant domestic movie business YTD, the box-office take in North America is off 3%, so the film studios have come to rely on Chinese capital to get their movies made and keep profits growing.
However, political and economic shifts coming from Washington and Beijing are threatening to create a storm of regulatory upheaval that could beach any future US-China media transactions.
“Hollywood should be worried because now we are seeing pressure [to crack down on deals] from both ends,” said a professor of political science at USC who studies China’s film industry. “Access to the Chinese market will continue, but investment from China in the US entertainment industry will be toned down considerably.”
There are signs of disruption in the China-Hollywood tie-up.
Several big deals that were in the works; Wanda’s $1-B takeover of Dick Clark Productions, the $345-M acquisition of Voltage Pictures by Chinese mining group Anhui Xinke and a $416-M investment by China’s HNA Group in US in-flight entertainment provider Golden Eagle have fallen over, as a regulatory crackdown in China happened at the State Counsel level sealing their cancellations.
Hollywood is not conducting its 1st independent audit of China’s reported box office.
The protectionist tendencies of President Trump have found bipartisan support from lawmakers, with several pushing for increased regulatory scrutiny of China-Hollywood deals.
On 1 August, Senator Chuck Schumer (NY), the ranking Democrat in the Senate called on President Trump to block all major Chinese investment in the US as a means of pressuring Beijing to do more to deter NKorea’s nuclear missile program.
At the same time Beijing officials have tightened restrictions on outside investment by Mainland firms, worried that too many companies are using US media acquisitions as a means of funneling money offshore.
On 3 August Viacom disclosed that it did not receive its expected June payment from Huahua Media, the Chinese group that has a 3-year, $1-B deal to fund 25% + of Paramount’s film slate. Paramount is counting on that cash to help it bounce up from years of financial losses.
Then there is the case of Dalian Wanda, which in July saw its standing as perhaps China’s most aggressive acquirer of Hollywood assets take a deep dive after the company and its Chairman, Wang Jianlin, became the target of a crackdown on debt that resulted in the $9.3-B fire sale of the bulk of its theme park and hotel interests.
Now, the company is barred from receiving loans from the country’s biggest banks, leading some to question the long-term financial health of the US companies in its line-up. Chairman Wang has been silent in the extreme.
Legendary insists it is business as usual, and does not have a new film hitting theaters until the Spring, when it rolls out Pacific Rim: Uprising, the sequel to the Y 2013 action-er that grossed $411-M worldwide.
Legendary’s recent run has been mixed, with DOA The Great Wall set against the global success of Kong: Skull Island. In Y 2015, the last year for which figures are available, Legendary lost $560-M.
There have been some encouraging signs that business still is being done, such as 7 August announcement that Tang Media Partners, with several Chinese backers, finalized the acquisition of troubled Spotlight studio Open Road Films, but, the really big deals of the Wanda-Legendary or Alibaba-Amblin variety are scarce to not existent.
The focus is now on Paramount’s financing agreement with Huahua, the last big studio slate deal signed after China began its crackdown.
The deal has been a money loser for Huahua so far, with disappointing box-office performances for Paramount’s recent titles, including Transformers: The Last Knight, which underperformed in the China, earning about $230-M Vs $320-M in China for Transformers: Age of Extinction.
HeffX-LTN sources say that a Chinese company spending big to acquire a piece of a Hollywood production house may become a thing of the past, and companies selling for crazy money to Chinese companies, those deals are over unless the Chinese firms in question have enough money parked offshore to bypass government restrictions on exporting capital.
The Xi run government is concerned that entertainment dealing it is motivated in part by a desire to get money out of China.
It’s no longer a Gold Rush but Beijing has shown it still willing to let mature Chinese entertainment companies like state owned CFG to make thoughtful investments in Hollywood.
Notably, if President Trump wants to crack down on China, he has options, including enacting Section 301 of the 1974 Trade Act, which allows him to take unilateral punitive measures, including fines and tariffs, against countries deemed guilty of “unfair” trading practices.
Even mere talk of such a move from the Trump Oval Office could pressure regulators to more closely scrutinize future deals and cast dark cloud over the China-Hollywood relationship.
“Already you are seeing a more cautious approach on the part of regulators who are worried about potential political blow back if they approve a deal,” says a Washington-based analyst with a top corporate investigations and risk consulting firm.
If Trump does take the strong option and reactivates Section 301, it could spell disaster for US-Chinese business, not least because Beijing is likely to play “tit for tat”, imposing fines or restrictions of its own on US companies.
China has a range of options,too.
Beijing can slap a billion dollar fine on American companies working in China, they can add new regulations or restrictions to anyone doing business there.
China always has a long-term plan and speaks with 1 voice. The US does not.
|HeffX-LTN Analysis for VIA:||Overall||Short||Intermediate||Long|
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Have a terrific weekend.
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