Hollywood Is Scrambling to Replace Chinese Funding
Hollywood Is Scrambling to Replace Chinese Funding
 26 September 2017

It was supposed to be one of the biggest deals yet in the budding relationship between Hollywood and China. In January, Shanghai Film Group and Beijing’s Huahua Media agreed to pay a combined $1 billion to help finance Paramount Pictures Corp.’s full slate of movies for the next three years. The agreement would ensure that potential blockbusters such as XXX: The Return of Xander Cage and Transformers: The Last Knight would have the funds to reach thousands of screens around the world—while giving the studio an edge in distributing and marketing movies in China.

Less than six months later the new partners missed making a scheduled payment to the studio. In late 2016 the Chinese government started to crack down on overseas investments in entertainment by mainland companies, a boom that began in 2012 when Dalian Wanda Group Co. took over U.S. theater chain AMC Entertainment Holdings Inc. “Everything’s on track,” Robert Bakish, chief executive officer of Viacom Inc., told analysts in August about the delayed payments. But now the studio is looking for other investors to replace the Chinese partners, according to a person familiar with the matter who declined to be named because the discussions are private. Huahua declined to comment; Shanghai Film didn’t respond to a request for comment.

Paramount isn’t the only entertainment company scrambling to make up for lost financing from the mainland. Chinese businessman Tony Xia’s deal to pay as much as $100 million for a 51 percent stake in Millennium Films, the studio behind The Expendables action movie series, was put on ice, thanks to the Chinese regulatory crackdown. And in March, Eldridge Industries LLC, which owns TV production company Dick Clark Productions, the company behind the Golden Globes, Billboard Music Awards, and American Music Awards, ended a $1 billion acquisition agreement with Wanda. Eldridge said the Chinese company wasn’t meeting its contractual obligations. Wanda declined to comment.

“Chinese investors exiting the market is a big deal,” says John Burke, head of entertainment at law firm Akin Gump Strauss Hauer & Feld, which has represented several Chinese investors seeking to co-finance films with U.S. producers. “They had become the latest wave of attractive funding for Hollywood.”

Any reduction in the number of deep pockets is bad news for Hollywood. With the exception of Walt Disney Co., the major movie studios (all units of bigger media companies) bring in financing partners to share the increasingly expensive costs of films. Production budgets of $150 million or more are common today, and that doesn’t include the tens of millions spent on marketing to drive consumers into theaters once the films are released. Universal Pictures’ The Fate of the Furious, released in April, cost $250 million, according to Box Office Mojo, while Sony Pictures Entertainment Inc.’s Spider-Man: Homecoming in July cost $175 million. Rather than being able to cherry-pick only the most promising releases, many transactions have investors commit funds to a large number of films—meaning they’re likely to back a lot of flops. Investors then share in the profits from the slate of movies.

Jim Gianopulos, Paramount’s new chief, acknowledged at a Bank of America Merrill Lynch conference in September that the studio’s deal with Shanghai Film and Huahua had been caught up in Chinese regulatory hurdles. He told attendees that Paramount has been approached by other potential partners to replace the Chinese. Deadline reported on Sept. 19 that Paramount is looking to Dallas billionaire Tom Dundon, who once owned a stake in subprime lender Santander Consumer USA, to help make up the shortfall. Calls and emails for comment to Dundon’s company, Dundon Capital Partners LLC, weren’t returned. The studio also renewed a deal in August with Skydance Media, a production company run by David Ellison, son of Oracle Corp. co-founder Larry Ellison, to co-finance a slate of films over four years, including new installments of its Mission: Impossible and The Terminator franchises.

“Film finance is kind of like whack-a-mole: Someone goes away, and someone else pops up,” says Barton Crockett, an analyst at FBR Capital Markets & Co. One new backer is Len Blavatnik, the Ukrainian-born billionaire who owns the Warner Music recording label. In April his Access Entertainment secured a stake in RatPac-Dune Entertainment LLC, a film production and financing company operated by film director Brett Ratner, financier Steven Mnuchin, and Australian investor James Packer. Packer recently pulled out of financing movies, as did Mnuchin after he became U.S. Treasury Secretary. RatPac-Dune has a $450 million financing deal with Time Warner Inc.’s Warner Bros. for as many as 75 films. The terms of Blavatnik’s deal aren’t public.

“I do feel that we are at a point where it may be harder to do those deals, but I don’t think they go away long term,” says David Shaheen, head of entertainment industries at JPMorgan Chase & Co. “There are investors who want to do more in this sector. Content assets are highly regarded.”

That won’t stop some investors from bolting. LStar Capital, a unit of Dallas-based Lone Star Funds, pulled out of a $200 million financing deal with Sony Corp. in July, 10 days before the release of The Emoji Movie, its lackluster animated film featuring Patrick Stewart as the voice of a pile of poop.

Still, the long-term value of intellectual property and the potential for new revenue streams as Hollywood’s business model evolves will attract investors, says Erik Hodge, managing director at the Raine Group LLC, an entertainment, media, and technology advisory firm. One such enticement: new internet distribution opportunities, says FBR Capital’s Crockett. The recent rise of digital distributors of content, including Amazon.com, Netflix, and Hulu, has created more revenue opportunities beyond theatrical release for financiers to get a return on their investments.

Even Chinese financiers may come back to the table eventually, Hodge says, because Asia’s film market is growing and needs alliances with content-savvy Hollywood. About 62 percent of the $874 million box office of Sony Pictures’ latest Spider-Man film came from outside North America—and two-thirds of overseas box office came from China.

But studios may have to give financing partners a larger share of the profits they’ve enjoyed on their biggest hits, taking a smaller share of revenue upfront and reducing the fees they pay themselves for distributing the movie. Says Hodge: “Terms will likely have to be adjusted to favor investors.” —With Jing Yang de Morel

BOTTOM LINE - In the past six months, Hollywood has seen film financing deals worth more than $1 billion unravel as Chinese investors and some hedge funds move away from funding movies.
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