Inside the Lionsgate-Hunan TV Deal (EXCLUSIVE)

How currency, censorship and co-production concerns spell deal-making with Chinese characteristics.

CHANGSHA, China — Befitting the largest ever Chinese investment into Hollywood’s production sector, the agreement between Lionsgate and Hunan TV took over a year to negotiate and was complicated by factors not normally part of western deal-making.

On Wednesday in China, the two companies are expected to detail the partnership, which will see Hunan TV put up a quarter of the North American mini-studio’s production budgets — worth up to $375 million of Chinese investment — over the next three years. The pact will also see Lionsgate handle representation of Hunan’s new Chinese-language movie slate in international markets.

But Hunan, which is considered to be China’s most progressive regional broadcaster, was not the first to have a crack at hitching with Lionsgate.

Top Chinese film studio Huayi Bros. was previously in negotiations to be Lionsgate’s financier. But Huayi pulled out of talks with Lionsgate, in order to pursue a link-up with Jeff Robinov’s Studio 8 instead. The talks between Huayi and Robinov then turned sour in June and Huayi found itself replaced by another Chinese firm – the Fosun Intl. conglomerate which has promised Studio 8 some $200 million.

Now Huayi is in the process of unveiling its own 18-picture deal with Robert Simonds’ STX Entertainment in the U.S., Variety has learned.

Sources close to Lionsgate’s negotiations with Hunan TV said huge amounts of patience were required as the two companies had many misunderstandings over meaning, even when intent was agreed. At other times both indulged in brinkmanship and threatened to walk away. The pair renegotiated some points several times over, even after putting elements in writing. “Chinese companies have a different time perspective than Americans when it comes to negotiations,” said the source.

Reflecting Hunan TV’s position as a state-owned enterprise, the final deal is understood to contain significant caveats stemming from China’s censorship and regulatory requirements. Some may go as far as to specify certain Western actors who are disapproved of by Chinese authorities because of their political positions, and who cannot be used in the co-financed movies, or whose films cannot be picked up for Chinese release.

Other negotiating points reflected Hunan TV’s insistence on a range of benefits flowing back to China, where the market is huge and fast-growing, but still underdeveloped. Many foreign companies looking to co-invest alongside a Hollywood studio are happy to make their bets on the U.S. alone, and some, such as Reliance in its agreement with DreamWorks 3.0, may not care about getting local distribution rights.

“Chinese companies are very China-focused. So we care about distribution in China, and more importantly getting Chinese-content films seen outside China, care very much about getting American expertise on production and the creative elements, and financial structures. A Japanese company might want distribution in Japan, but they likely don’t care about producing in Japan or having Japanese talent in the movie,” said the source.

Getting money out of China is another issue, because the renminbi is a currency with strict exchange restrictions. Hunan TV is understood to have set up a dedicated Delaware company to facilitate currency and taxation issues.

“This deal is real, and huge. It is locked in and has a massive payment on closing,” said the source.

“This is going to change the landscape. The value of Hunan’s stock is up $700 million [on news of the deal]. Other companies are going to follow suit. From now on [the Hollywood China connection] is going to get real, ultimately leading to the acquisition of a studio.”

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