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Mergers & Acquisitions

Is ruined Dick Clark deal the beginning of the end of China’s Hollywood buying binge?

Wanda’s latest plan for big-screen glory is in tatters. Some suggest a lack of cash, or Trump’s anti-Chinese rhetoric, while others insist it’s more to do with Chinese government pressure to cut back on excessive foreign buying

PUBLISHED : Friday, 17 March, 2017, 5:48pm
UPDATED : Monday, 20 March, 2017, 2:52pm

China’s tightening capital controls and the increasingly protectionist tone of Donald Trump’s administration may have combined to deal a blow to the shopping spree among Chinese companies for Hollywood assets.

Even Asia’s wealthiest man, Dalian Wanda’s Wang Jianlin, has not been spared, as his US$1 billion planned takeover of Dick Clark Productions (DCP) was abandoned last week, reported by many in the industry because of a simple inability to come up with the money to fund the transaction.

Anhui Xinke New Materials’ also failed to take over Voltage Pictures, the Hollywood studio behind blockbuster Dallas Buyers Club, for $350 million, while Shanghai Film Co and Huahua Media are said to be running into trouble sealing their US$1 billion joint deal with Paramount.

“If the purchaser is a high profile figure in China then the transaction is likely to attract a greater level of public scrutiny,” said Charles Butcher, partner with law firm Eversheds and an international M&A expert.

Backtracking somewhat on President Xi Jinping’s urge for China to project its soft power globally, regulators in Beijing are not only trying to block cross-Pacific investments on a large scale, but also acquisitions of blockbuster Hollywood targets, for which they consider buyers have been too willing to “overpay,” industry insiders say.

But even if the successful bidders are fortunate enough to get Beijing’s green light, they can then find it equally hard to get around roadblocks set up by Washington – particularly such prominent names as Wanda.

China’s capital controls ‘can harm currency, global ambitions’

President Trump is well-known for his provocative remarks on China, and already 16 US congressmen have called for a special government review on Chinese purchases of media and other “soft-power” institutions, on national security concerns.

The other two latest deals to have fallen firmly under the spotlight are for Paramount Pictures, the studios behind top-grosser Titanic, and Expendables series producer Millennium Films, which have run into the same kinds of issues facing Wang’s failed move on Dick Clark – an iconic American entertainment company behind the Golden Globe Awards and Miss USA Pageant.

Last week, DCP said it had killed the deal, as Wanda “failed to honour its contractual obligations,” and is now claiming a whopping US$25 million termination fee in a lawsuit filed against the Chinese conglomerate. A spokesperson for Wanda declined to comment on the matter.

The sudden termination of the deal, which was given wide publicity when first announced in October, marks an abrupt halt to the 62-year-old Chinese billionaire’s worldwide ambitions to expand, even dominate, the global entertainment industry, from film to football.

“There has always been talk about whether Wanda would buy a Hollywood studio,” said Roger Garcia, executive director of Hong Kong International Film Festival Society.

“If Wanda is unable to pay US$1 billion for DCP, then Chinese acquisitions of Hollywood studios look like becoming a little more complicated now,” the film veteran added.

Wang’s bid for Dick Clark generated a buzz in Hollywood, just weeks before Trump’s shock election victory.

During one trip to the global entertainment capital, Wang made no secret to the US media that his next step would be to splash out billions on one of the “Big Six” Hollywood studios, which include Universal Studio and Paramount.

“We used to have a sense that Wang could do anything he wants to – but it seems his magic is not always there,” said Lub Bun-chong, director with L Consultancy, which specialises in mergers and acquisitions in media industry.

Hollywood producer behind Godzilla, Batman movies resigns as Chinese owner Wanda mulls ‘big plans’

But Wang is at the forefront of an army of cash-rich Chinese tycoons scrambling to pour money into the American entertainment capital, hunting for Hollywood content that remains immensely popular among Chinese filmgoers.

Internet giants such as Tencent and Jack Ma’s Alibaba, which owns the South China Morning Post, have either snapped up stakes in film companies or inked a flurry of deals with Hollywood heavyweights to co-finance blockbuster features such as Transformers.

“Normally, you get a project and then look for money; but today in Hollywood it is Chinese money that is chasing the projects,” Andrew Hevia, a co-producer of Oscar-winner Moonlight, told the Post in Hong Kong.

Last year had been a particularly frenetic one for Wang. The property billionaire also added Jurassic World producer Legendary Entertainment and Carmike Cinemas, valued at a combined US$4.6 billion, to his stable of companies.

“They want to have a seat at the table, and to learn by directly accessing the best talent and storytelling techniques,” said Los Angeles-based entertainment lawyer Lindsay Conner at Manatt, Phelps & Phillips, who advised on a $500 million financing deal between China’s Perfect World Pictures and Universal Pictures last year.

China’s deal making in the US has exploded over the past two years.

Last year alone the volume of entertainment-related deals skyrocketed thirty-fold to US$4.8 billion from 2014, according to Rhodium Group, which tracks Chinese direct investment in the US.

Industry pundits, however, had already started to worry the purchasing binge was more to do with Beijing’s backing of domestic companies buying their way into influencing global culture.

And with the governments on both sides of the Pacific altering their paths, many now expect a halt or certainly sharp slowdown in attempted takeover deals.

They want to have a seat at the table, and to learn by directly accessing the best talent and storytelling techniques
Lindsay Conner, Los Angeles-based entertainment lawyer who advised on a $500 million financing deal between China’s Perfect World Pictures and Universal Pictures last year

Dalian Wanda’s US$1bn deal to buy Dick Clark unravels

The spending spree has been put under pressure, particularly, as Beijing struggles to stem record capital outflows and subsequent downward pressure on the yuan, with regulators tightening their scrutiny of overseas mergers and acquisitions.

Entertainment and real estate transactions, especially, have been singled out as “chief target sectors”.

“A number of enterprises have made irrational overseas investments in properties, hotels, cinemas, entertainment companies and sports clubs,” Gao Hucheng, the country’s Minister of Commerce, told a press conference in February.

Copper firm Anhui Xinke New Materials’ recent failed takeover of Voltage Pictures, the Hollywood studio behind blockbuster Dallas Buyers Club, for $350 million, highlighted the growing problem for Chinese buyers.

“It might revolve around whether the deal makes sense, or if it is only intended to get money out of the country,” said Jonathan Yunger, vice president of international sales with Millennium Films/Nu Image.

In February, Yunger’s company agreed to sell a 51 per cent stake to conglomerate Recon Group, the Chinese owner of British football club Aston Villa, for $100 million, and he considers the US$350 million Voltage deal “may be overvalued”.

What has become clear is that Beijing is cracking down on transactions they perceive as being vehicles solely used to offload cash offshore, though many remain in the dark as to exactly which sort of deals fall into that category.

China’s new capital control measures include a stricter checking process for overseas payments of more than US$5 million, and a ban on deals valued at over US$1 billion “outside the investor’s core business”, according to regulatory documents seen by the Post.

These deliberately-drafted terms, however, fail to fully explain the exact trouble with the US$1 billion deal between Hollywood giant Paramount and two notable Chinese film companies, Shanghai Film Co and Huahua Media.

Tips from China’s richest man: Wang Jianlin shares his secrets to success as Dalian Wanda goes global

The alliance, which expected to see the Chinese partners finance the Transformers producer’s theatrical output over three years, is also now at risk of collapse, according to industry sources, because the regulators have firmly put their feet in the way.

A representative from Huahua Media said the company “would not comment on speculation”, while Paramount did not reply the Post’s email seeking comment.

A couple of other investors, including Millennium buyer Recon Group, are believed to be facing similar difficulties in transferring their capital from China to the US, stalling their planned Hollywood tied-ups, the Post has learnt.

That is in spite of both individual transactions pegged at below the US$5 million threshold, and one of those concerned counting entertainment very much as their core business.

Under the current sensitive regulatory climate, China’s major state-owned lenders have shown they are not shy of pulling the plug on cross-border money transfers, regardless of their nature or scale, Hong Kong-based bankings sources have told the Post.

In US films nowadays you rarely see Chinese characters as bad guys... Chinese don’t like it, of course
Li Ruigang, China’s top media mogul whose company has co-produced Kung Fu Panda 3, told last year’s World Economic Forum in January

In the case of Wanda, however, industry insiders suggest it wasn’t to do with China’s notoriously “vast and vague” regulatory hurdles, but escalating uncertainties in the US under the Trump administration which prompted one of Asia’s most powerful conglomerates to back away.

“It will be extremely hard for the Dick Clark deal to go ahead in America, because first of all, it is a 100 per cent buyout, and secondly Wang already controls aplenty of entertainment assets there, ”said Lub from L Consultancy.

The tycoon, who served in the army and later in government before jumping into property business and catapulting himself into the country’s business elite, is seen as one of the best politically connected businessmen in China, a country where all land belongs to the state.

That clout has been rapidly expanding into the US, where he owns the world’s biggest cinema chain and controls a major Hollywood studio, the struggling Legendary.

Wang’s growing portfolio has unnerved multiple American politicians. Last September, 16 congressmen urged Washington in a letter to impose tougher scrutiny of Chinese investments in the entertainment industry, singling out Wanda’s buyout of Legendary.

There have been “growing concerns about China’s efforts to censor topics and exert propaganda controls on American media,” they said.

Dalian Wanda chairman warns US on barriers to Chinese investment in Hollywood

It is no secret that the world’s second largest economy is using its enormous market size to influence Hollywood’s way of thinking, and how American film studios make movies.

On the flipside, “Hollywood is relying on China’s box office, and it is not uncommon for us to see films featuring content that pleases Chinese audiences,” said Millennium Films’ Yunger, who travels to China many times a year to meet buyers and investors.

With its invigorated population flooding movie theatres in hundreds of millions, Chinese audiences have rescued a slew of big-budget titles that flopped in the US, such as fantasy Warcraft, which grossed much bigger ticket sales in China.

“In US films nowadays you rarely see Chinese characters as bad guys... Chinese don’t like it, of course,” China’s top media mogul Li Ruigang, whose company has co-produced Kung Fu Panda 3, told World Economic Forum in January.

Coincidentally, in another panel of the forum, Wanda’s Wang stressed his primary interests lie in making money, with no intention to interfere with content.

He also gave a warning to Trump that the US would bear the cost of a heavier scrutiny over Chinese-Hollywood deals.

In a series of attacks against China, the US president has threatened to label Beijing a currency manipulator and impose tariffs of as much as 45 per cent on Chinese goods, triggering fears of a trade war.

“Recent appointments by President-elect Trump suggest a more confrontational approach to trade and investment policy toward China,” Rhodium Group said in a report.

While there are escalating signs the US politicians are going to take a hard line on Chinese investors, the country’s entertainment industry – hungry for cash and market access – is still embracing the Middle Kingdom financiers in a big way.

“In Hollywood, we love them,” Yunger said.

With additional reporting by Xie Yu

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