Chinese companies have poured billions into the U.S. entertainment industry in recent years, and for awhile their government has looked on with little intervention.
It seems that is changing, and the effects are reverberating through Hollywood and elsewhere in the industry.
Dalian Wanda Group Co. Ltd. recently scrapped a $1 billion deal to buy Dick Clark Productions Inc. While that is the only major deal cancellation to date, others, like Paramount Pictures $1 billion financing partnership with Shanghai Film Co. and Huahua Media, are stalled as a result of China's crackdown on money leaving its borders.
"If these companies have signed commitments, which they have, but have yet to fund those commitments, that could be an issue if they don't have capital outside the country already," Moody's analyst Neil Begley said in an interview.
Viacom Inc. executives previously have pointed to the Paramount financing deal as a centerpiece to the restructuring of the studio. Viacom CFO Wade Davis said on the company's most recent earnings call that the deal would fund 25% of the year's productions and "help us de-risk the entire 2017 slate." Those comments came after Viacom sent Davis to Hollywood to secure the financing and help restore Paramount to glory after a $450 million loss in fiscal year 2016. Viacom did not immediately respond to request for comment.
The deal would also serve as a way to release films in China under a coproduction strategy. China heavily restricts the timing and number of foreign films that can debut in its theaters, but those restrictions do not apply to coproductions between U.S. and Chinese entities.
The pullback in financing has been coming for some time, argued Larry Namer, CEO of Metan Global Entertainment and founder of E! Entertainment. Namer's Metan Global produces digital and television entertainment for the Chinese market, but because his company focuses all its resources inside China, it has been relatively unaffected by the pullback. By contrast, many other Chinese investors and entertainment companies have been pouring money into Hollywood at a rate some might consider irresponsible, he said.
"For a while everybody in Hollywood thought Chinese people came here with suitcases full of cash, and it doesn't matter what you pitch them," he said.
He pointed to the $1 billion Dick Clark Productions deal as a clear example of overspending. Moody's Begley said the $3.5 billion acquisition of Legendary Entertainment by Dalian Wanda also seemed "aggressive." The analyst said that the clamor to buy U.S. media and entertainment properties at high valuations is very "bubble-like," and the pullback is not that surprising given the recent activity.
While the Chinese government is restricting investments in Hollywood, Chinese companies also are becoming more savvy with their deal-making, Namer said. The Legendary Entertainment deal was considered overvalued by many in the industry, and the property is not performing well enough to justify the multiple Dalian Wanda paid, he added. This and other poorly conceived deals serve as warnings for future investors, Namer said.
But for many such deals, the Chinese buyers were not necessarily incentivized to bid at a competitive valuation. A Chinese buyer that overbids will likely win the deal, and then it can take that Hollywood brand name, package it in an IPO or other securities and sell it to Chinese investors for more than the deal valuation, largely on brand-recognition alone, Namer said. The practice of overcharging investors on an inflated valuation likely caught the attention of the Chinese authorities, who are seeking to stamp out the practice, he added.
While companies like Paramount, and perhaps other smaller names that depend heavily on cross-border partnerships with Chinese investors, may feel an outsized burn from China's pullback, the industry as a whole should only see short-term consequences, Begley said. China has been a major investor in recent years, so its absence will be felt, but many studios do not rely heavily on Chinese money, he noted. These studios use Chinese investments to reduce risk in a film slate, not as a means to obtain otherwise unattainable financing. Most of the major Hollywood studios have been consolidated into a handful of big conglomerates, which have plenty of access to internal financing and typically decent credit ratings.
"When it came to capital from China, many of these companies that were doing these deals were being opportunistic because they were getting good terms, and they were getting their foothold in the Chinese market," Begley said.
Namer agreed that any impact from the pullback will only be felt briefly. "It's a very sexy business, and there's always money that flows into Hollywood," he said.