Chinese and U.S. Studios Keep Options Open in M&A Merry-go-Round

Lionsgate shares got a boost Monday following a news report suggesting that Dalian Wanda, China’s largest property developer, was casting an acquisitive eye over both Lionsgate and MGM, a perennial takeover target.

Investors got a similar frisson in October when it was rumoured that another Chinese behemoth, Alibaba, the recently-listed e-commerce group, was also crunching Lionsgate’s numbers.

Other U.S. corporations may also be acquisitions targets for the Chinese.

DreamWorks Animation and even Sony Pictures Entertainment – the currently profitable, and therefore saleable Hollywood movie and TV division of Japan’s beleaguered Sony Corporation, may also be in the firing line. And after Rupert Murdoch pointed the way, even Time Warner may not be immune.

With cashed up Huayi Brothers Media and Fosun, and Internet giants Tencent and Sohu and technology group Xiaomi all also pursuing active U.S. expansion strategies, there is real potential for major deals between China and Hollywood.

But the corporate posturing and excited mergers and acquisitions talk does not mean that a game changing takeover deal is imminent.

“Dalian Wanda Group Co. has made no secret of the fact that it is interested in expanding its interests in the entertainment sector and is therefore exploring a range of investment opportunities. At this stage we are unable to make any further comment,” Wanda told Variety, Tuesday.

Several Chinese companies are desperately keen to make their mark on the global media and entertainment scene. And they see corporate moves in North America as achieving that objective faster than organically building U.S. content divisions, and far quicker than trying to export incremental amounts of Chinese content.

But many of China’s business bosses are good students of history and are acutely aware of the poor track record of most previous overseas raiders in Hollywood. For all the money burning holes in their pockets, nobody in the Chinese C-Suites wants to be labelled as the latest foreign sucker. That may lead many to walk away.

With the Chinese box office growing at a compound annual growth rate of 32% between 2003 and 2013, there is plenty of financial incentive to invest close to home.

Some of the recent bid processes have been cut short almost as soon as they became public knowledge, witness the serial collapses of DWA’s talks with potential suitors Hasbro and before that Softbank of Japan.

Others have stalled in public view. Jeff Robinov’s nascent Studio 8 had been in talks with Huayi Brothers to receive a $120 million investment. It was reported that Huayi had difficulties either raising the cash internally or syndicating it to other parties. But with one of Huayi’s co-chiefs Wang Zhongjun last month paying $62 million for a Van Gogh painting, and the company is now in line to receive a $580 million investment from Alibaba and Tencent, liquidity was likely not the issue.

More plausible is that Huayi, as a distributor and end user of the movie slate, simply calculated a different return on investment to entertainment newcomer Fosun which stepped in with a $200 million check.

Previously Hong Kong engineering and construction firm walked away from a deal to finance Legendary East, Legendary Entertainment’s Chinese start-up venture. Legendary East has since raised cash from a small consortium of backers known to include experienced entertainment sector investor IDG and believed to include China Film Group. (IDG is also an investor in Ryan Kavanaugh’s Relativity Media.)

With the Chinese and U.S. film and TV industries at vastly different stages of maturity finding the right corporate fit is likely to be a tricky – and possibly protracted – process.

One Asia-based corporate insider, who is close to Lionsgate chief Jon Feltheimer and has done business with Alibaba’s Jack Ma for over a decade, recently told Variety that the talks are ongoing, but still exploratory at the moment.

Alibaba, with its multiple expanding lines of business, potentially offers U.S. companies a China platform in movie production, online video distribution, marketing and merchandizing. Wanda too has vertical integration that spans production, distribution, theatres, theme parks, and studios. But if the U.S. parties prefer an alliance of equals to an outright takeover such a conglomerate approach may not suit all tastes.

Speaking after last month’s U.S.-China Film Summit in Los Angeles, Brian Goldsmith, co-chief operating officer of Lionsgate Entertainment, insisted that Lionsgate is already well-implanted in China and would obviously like to be more so.

But he told Variety that the group would prefer one Chinese partner for each line of business, rather than a single over-arching corporate deal.

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