Hollywood is left hanging as China reins in investments
Deals stall amid capital curbs, including one that would have put MGM under Chinese control
Alistair Barr & Mark Bergen | WSJ
February 27, 2017 Last Updated at 02:51 IST
Wang Jianlin, chairman of the Wanda Group
China’s crackdown on overseas investment is hitting Hollywood, torpedoing a deal that would have put Metro-Goldwyn-Mayer Studios under Chinese control and placing other high-profile acquisitions in limbo.
Talks broke down between MGM and several Chinese companies late last year, an apparent casualty of China’s move to stanch capital outflows that has stalled the country’s shopping spree in Hollywood, according to people familiar with the matter.
The change comes after years of Chinese companies striking large deals, including the $3.5 billion acquisition of Legendary Entertainment in 2016 and a $1 billion film-financing infusion for Paramount Pictures last month.
An MGM sale would have been among the biggest-ticket and highest-profile such acquisitions, but its failure to materialize is evidence of a twist ending that few in Hollywood expected.
Beijing’s capital-control policy, which began in November, has kept deals such as the $1 billion acquisition of Dick Clark Productions by real-estate conglomerate Dalian Wanda Group Co. from closing, according to people familiar with the matter, and scuttled the takeover of smaller production companies.
The new dynamic highlights Hollywood’s dependence on China, where the slightest change in state policy has ripple effects across the entertainment industry. China’s deep pockets have become a frequent topic of speculation and intrigue among entertainment executives, some of whom see the country as full of prospective buyers willing to pay high premiums for flashy Hollywood holdings.
The economic-policy changes in China come amid mounting protectionist rhetoric in the U.S. from the administration of President Donald Trump.“We’ve heard from both [private-equity] firms and investment banks that China investment activity around [Hollywood] assets started to wane just prior to the election and is almost nonexistent now,” said Chris Fenton, a trustee of the U.S.-Asia Institute, which organizes congressional delegations to China, and president of DMG Entertainment, a media company headquartered in Beverly Hills and Beijing. “No China entity wants to be the first to test” the heated rhetoric on the U.S. side and the capital controls on the Chinese side, he added.
An MGM spokeswoman said: “MGM is in the strongest position ever and is not for sale.”Once known for producing classics of Hollywood’s Golden Age such as “The Wizard of Oz” and “Singin’ in the Rain,” MGM is now much smaller, owned by private-equity firms and long considered a likely takeover target. The studio’s most valuable asset is its film library, which includes several thousand titles, including co-ownership of numerous James Bond films.
Interest in MGM from China heated up last year when Viacom Inc.’s Paramount Pictures considered a rich acquisition offer from Wanda, according to a person familiar with the matter.
MGM wasn’t the subject of a formal auction process, according to a different person familiar with the matter, and has indicated to potential business partners that it may pursue a public stock offering in the next couple of years.
Chinese companies last year announced a record $225 billion in international purchases. Beijing keeps tight controls on money flowing out of the nation, concerned such capital flight could shake confidence in its economy and potentially weaken the yuan. That has led to greater scrutiny of overseas acquisitions to ensure they aren’t being made to evade capital controls.
Chinese companies that want to invest internationally typically submit applications to at least two regulators: the Ministry of Commerce and the National Development and Reform Commission, the country’s top economic planner. Once those applications are approved, the decision moves to a third regulator, the State Administration of Foreign Exchange. Regulators are still accepting applications, a person involved in Chinese outbound media deals said, but some applications appear to be in limbo and haven’t received a formal response, which has ground deals to a virtual halt.
In recent years, China has become a go-to source of capital for Hollywood. Studios have co-financed productions with Chinese firms and raked in billions in ticket sales in the country, now the world’s No. 2 box-office market.
But to some extent any deal with China represents a roll of the dice, said one longtime Hollywood executive. In the U.S., it is relatively easy to predict what might trip up government regulators, but in China there is little transparency about the state’s concerns.
“You have no way to assess what they might say about a deal,” the executive said.
In December, Chinese metals manufacturer Anhui Xinke New Materials Co. said it was canceling its roughly $350 million acquisition of Voltage Pictures LLC, a Los Angeles film financing and production company best known for “The Hurt Locker” and “Dallas Buyers Club.”
“They were really close to the end of the deal,” said a person close to Voltage. “Suddenly, the deal’s off and they never really got any clear communication from Xinke as to why.”
Voltage is suing Xinke and the Chinese company’s law firm for breach of contract, seeking more than $300 million in damages. Xinke has said in regulatory filings to the Shanghai Stock Exchange that Voltage didn’t provide additional information requested by that regulator. Xinke didn’t return calls or an email seeking comment.
On Thursday, China-based Recon Holding announced it would pay $100 million for a 51% stake in Millennium Films of Los Angeles, which produces “The Expendables” and “Olympus Has Fallen” franchises, and has a library of nearly 300 films. A person close to the deal said the crackdown made Recon more sensitive to regulatory concerns, adding that Chinese support for the transaction was helped by the fact that Millennium films have performed well in Chinese theaters. Wanda’s purchase of Dick Clark Productions, producer of the Golden Globes and other awards shows, was announced in November, but it is in limbo, according to people familiar with the matter. Dick Clark’s current owner, Eldridge Industries, still expects the deal to close, according to a person close to the company.
Wanda has had little trouble in the past getting money out of China for such deals. It paid $3.5 billion in early 2016 for Legendary Entertainment, which produced “The Great Wall,” and its AMC Entertainment Holdings Inc. theatrical chain has acquired several other exhibitors around the world in recent years. Wang Jianlin, Wanda’s chairman and China’s richest man, has repeatedly said he wants to own a major Hollywood studio.
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