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Hollywood gets caught up in China's crackdown on overseas deals

Tuesday, March 14, 2017 - 08:21

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In a reversal of last year, when Chinese companies' purchases climbed to a record, deals are headed for their lowest levels since the financial crisis. Dalian Wanda Group's US$1 billion acquisition of TV company Dick Clark Productions Inc was called off last week.

[LOS ANGELES] The tide of Chinese money flowing into Hollywood is showing signs of receding.

In a reversal of last year, when Chinese companies' purchases climbed to a record, deals are headed for their lowest levels since the financial crisis. Some transactions are even collapsing. Dalian Wanda Group's US$1 billion acquisition of TV company Dick Clark Productions Inc was called off last week. A takeover of US$4.6 billion movie maker MGM Holdings Inc by Chinese buyers never even got off the ground.

In neither case did acquirers disclose what caused them to abandon their deals, but the assumption among sellers and dealmakers was to point to increasing pressure within China, where the government is working to stem capital outflows and keep the yuan from deteriorating further.

Officials in China are more closely scrutinising "irrational" outbound acquisitions - transactions with big price tags - tying the hands of dealmakers. On the other side of the world, some US lawmakers have called for the government to slow the pace at which Chinese companies are snapping up American media targets.

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"The vise created by regulatory authorities in both China and the US has formed two distinct sets of obstacles for cross-Pacific dealmaking," said Chris Fenton, a trustee of the US-Asia Institute who's also president of DMG Entertainment Motion Picture Group.

"Private-equity firms have been very vocal to us about the slowdown in deals involving China too."

Chinese companies have completed less than US$2 billion in acquisitions overseas since the start of 2017, heading for the lowest quarterly tally in eight years, according to data compiled by Bloomberg.

Eldridge Industries became the latest victim of the scrutiny on Friday, when the company terminated its sale of Golden Globe Awards producer Dick Clark to Wanda after the Chinese conglomerate failed to make payments on time. Eldridge sued Wanda in a Delaware court to recover a breakup fee it believes it is owed. Wanda declined to comment.

Such deals pale in comparison to China's biggest international transactions, such as the US$43 billion acquisition of Syngenta AG by China National Chemical Corp, currently under regulatory review. But entertainment has been among the industries singled out for scrutiny by Chinese authorities.

Last week, People's Bank of China Governor Zhou Xiaochuan said that some of the investments in sports clubs and entertainment didn't fit with China's industrial policy.  "Those investments do not do much good for China," Mr Zhou, China's longest-serving central banker, told reporters during the National People's Congress in Beijing. "These deals triggered some complaints abroad. Therefore, we think it's necessary to provide some policy guidance and we believe such guidance has been effective."

Then there's Viacom Inc's Paramount Pictures, which has been funding big-budget movies such as Transformers and Mission: Impossible with Chinese partners since 2014. Paramount agreed earlier this year to a co-financing deal with Huahua Media and Shanghai Film Group but that deal has been hindered by difficulties transferring funds, according to Variety. Paramount didn't respond to requests for comment, and representatives at the Chinese companies didn't comment.

Signs of problems began emerging late last year, when Chinese copper manufacturing company Anhui Xinke New Materials backed out of a deal to buy Voltage Pictures, co-producer of the Oscar-winning movie The Hurt Locker.

In late 2016, a group of US lawmakers including Republicans Robert Pittenger, Devin Nunes and Ken Calvert, asked the government to more closely scrutinize Chinese takeovers of American companies, including those by Wanda.

Despite tough talk on China during the election last year, President Donald Trump hasn't intervened publicly in Chinese companies' attempts to make acquisitions in Hollywood. He would be wise to steer clear, Wanda chairman Wang Jianlin said in January.

"If the US blocks Chinese capital, China can retaliate with protectionist measures. This won't be good for anyone," Mr Wang told Bloomberg News Editor-in-Chief John Micklethwait during a panel at the World Economic Forum in Davos, Switzerland. "Let's not fight over entertainment."

Wanda has been the most aggressive Chinese buyer in entertainment, assembling the biggest movie-theater chain in the country by acquiring control in 2012 of AMC Entertainment Holdings Inc., which then bought Carmike Cinemas Inc late last year. Wanda also bought Legendary Entertainment, the co-producer of Jurassic World and Godzilla, for US$3.5 billion last year.

The Dick Clark deal was supposed to be the next step in Mr Wang's ambition to build an entertainment empire on both continents. He has often expressed a desire to acquire one of Hollywood's major film studios and has said he wants to control 20 per cent of the global movie market by 2020.

Some China-Hollywood deals are still getting done. China's Recon Group Inc, which bought the UK's Aston Villa Football Club, agreed to acquire a majority stake in Millennium Films last month, the Hollywood film producer behind action films such as The Expendables and one of the Rambo films.

Tony Xia, chairman of Recon Group, said he was able to do the acquisition of Millennium because the group used a corporate entity registered in Hong Kong for the purchase, with funds already parked offshore.  Mr Xia said Recon had benefited from the recent crackdown because the curbs deterred competing bids and cooled off some sellers' expectations.

"Chinese buyers have been viewed in Hollywood as 'dumb money.'" Mr Xia said in an interview last month. "Sellers and investment banks brokering deals often raise the price irrationally high. The curbs have helped rationalise their expectations."

Mr Xia said his appetite for overseas acquisitions hasn't abated.

"The curbs were to prevent loss of foreign exchange reserves and transfer of assets and wealth," he said. "But as we've often seen in China, government intervention tends to be overdone."

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