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Lionsgate CEO Jon Feltheimer on Hunan TV Deal: ‘We Talked to Everybody’

On Wednesday, Lionsgate signed a lucrative deal with Chinese broadcaster Hunan TV which will see Hunan provide the U.S. studio $375 million in production funding over three years. Films specified under the deal include “Gods of Egypt,” “Now You See Me 2,” supernatural thriller “The Last Witch Hunter” with Vin Diesel, thriller “Sicario,” and “Age of Adaline,” starring Blake Lively and Harrison Ford.

Below, Lionsgate CEO Jon Feltheimer explains the context of the strategic tie up in China that led to the largest Chinese investment in Hollywood productions to date.

Variety: Why pick Hunan TV as Lionsgate’s China partner?
Jon Feltheimer: The Hunan group and their various subsidiaries and relationships, which include broadcast, cable, film production (TIK), film distribution (Leomus), the connection with the largest advertising agency in the county, their reach in outdoor advertising. And their theme parks. When you check all those boxes it seemed to us that that in one fell swoop we could create a relationship that helps improve our chances in the Chinese marketplace, in our core businesses of film and TV production and distribution.

Variety: How many other companies had you spoken to?
Feltheimer: We talked to everybody, and we could still be in business tomorrow with Huayi or Wanda. We can be in business with a lot of people.

[Hunan/Leomus] can take up to four films to distribute. We hope to do a lot more. Last year we released seven in China.
We’ve had a long relationship with Televisa and are in business with them in about five different ways. With Studiocanal, we’ve been with them for a long time in four or five significant ways. When I look at them or CBS, where we just took on CBS’s film distribution, or Netflix’s people, these are long term relationships where we can do a number of different things. And I see Hunan as the same thing. And we’ve liked the people we do business with.

Variety: Are you still talking to Wanda?
Feltheimer: The implication [of a recent media story] that we are still talking to Wanda about an investment in the company is not accurate. We like Wanda very much. There’s not a negotiation.

Variety: Are other Asian companies negotiating to buy the stake in Lionsgate owned by Mark Rachesky?
Feltheimer: The stake is not for sale. There is no process going on. I honestly don’t believe Dr. Rachesky has had any conversation about selling it in a long time. I think he is very satisfied with the investment and think he likes the direction that the company is going. You should ask him.

Variety: How will Hunan TV be co-investing in Lionsgate’s movies?
Feltheimer: They are in all qualifying films up to $125 million per year for three years. Qualifying meaning virtually everything. It has got to be R-rated or less, 500 screens or more, movies that don’t disparage China. In practice they will be investing in every film we do, 25% of the equity. And if we offer it up they have some ability to invest more.

Variety: How does the waterfall work?
Feltheimer: We take a reduced distribution fee and then it is pro-rata. We don’t look at our business as a gross business. You bring in the business, you subtract the costs, part of the cost is our distribution fee, and after that we split the profit 75:25.

Variety: What are the exclusions?
Feltheimer: The existing franchise films [‘Twilight,’ ‘Hunger Games’ ‘Divergent’] are out, though it is possible that under certain circumstances [Hunan/Leomus] could be the distributors of future movies in those franchises.

Variety: Are you planning to produce more of your English-language movies in China?
Feltheimer: Co-finance Hunan TV is doing already. Co-production would imply a better rating or a better split, we’d do it only if it truly warrants that.

Putting Jay Chou in ‘Now You See Me 2’ is going to help the movie work great, but it is not a co-production. If there is a reason for a movie to be a true co-production then great, but don’t create one when there’s no reason.

Variety: Co-production have been seen as a reaction to China’s import quota system. Is that going to change?
Feltheimer: Of course [the quota system] will change. But we don’t know in what direction. We are told in 2017. You don’t do a movie just because you can get a better split in China. If this TV show ‘Shanghai’ currently being developed with Chinese playwright David Henry Wong, is going to be done in China and involve a lot of Chinese people, producers and distributors, that’s something the government is going to really want. And there will be a transfer of technology and processes.

Variety: Hunan TV has not had much of a feature film business to date. Will Lionsgate be making more movies in China?
Feltheimer: They have done a fair amount. They are not as high profile as other companies, but I think they are very committed to growing that business.

[Hunan] announced some of the films they are developing [and talent they are working with]. We’ve met with some of the same people. I would not be surprised if we invested in and co-financed those movies. We have a template with Hunan Broadcasting. We’ve created a very specific template about sharing resources together in a number of different ways, co-developing formats, nest formats here that will go there and vice versa. And we are developing something with U.S. producer Jordan Kerner.

Variety: Is “Candy Crush” a TV format destined for China?
Feltheimer: We have the rights to create “Candy Crush” into a TV show, we have a great producer, and that is one that I could potentially be talking to Hunan Broadcast about. It is a big, high production value show. We would build out the look of the game from mobile. One of the ways we could do it is to build one really great, high value set and then [shoot with] multiple casts.

Variety: Does Lionsgate have the financial capacity to do all these things?
Feltheimer: We are not an highly-leveraged company. We recently did one of the lowest non investment grade debt deals in history, not just in the entertainment business, but for any company. We’ve got $375 million fixed at 5% for around seven years. So there is no dearth of finance.

But the truth is that when people invest in you and your business they tend to focus a lot on it. There are so many ways that Hunan can help us that to have them investing with us is important.

Variety: What is the role of the new Beijing office?
Feltheimer: To be closer to the market. We have Billy Neo already doing a great job looking at all of the businesses in terms of being local, looking for great projects for film and television, interfacing with Hunan, keeping an eye on everything that we distribute in the marketplace, and keeping our distributors honest. All the reasons that you want to be as local as you can, any time that you can.

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