What’s Behind Wanda’s Interest in a Hollywood Studio?

“Whatever you are hearing about Wanda and Paramount is not coming from Wanda,” one Wanda source told Variety on condition of anonymity. “It is most likely coming from the Viacom side.”

“But, frankly, we are not clear whether such a deal could go ahead. We don’t know if Viacom and Sumner Redstone would agree.”

Wanda and other ambitious Chinese groups have spent years examining the possibility of owning a Hollywood studio, and months looking at Paramount specifically. Now, according to reports from The Wall Street Journal, Chinese property to entertainment group Dalian Wanda is alone and in exclusive talks.

The company’s hesitation about confirming the negotiations is understandable. It is a matter of face. And anyway the talks may fail.

Other candidate buyers that have fallen by the wayside included China Media Capital, e-commerce giant Alibaba, and the state-backed China Film & Television Fund.

All were attracted by the growing strength of the China-U.S. entertainment industry relations and by the potential prize of owning a ‘major studio,’ delivering global franchise movies, and winning Oscar trophies. But they have each now either ruled out a bid for a piece of Paramount, or been ruled out.

China’s film industry has sustained a growth pace of over 30% a year for most of the past decade. Last year box office rose by 49% to reach $6.6 billion. It could hit $8 billion this year.

That has enriched several corporations and confirmed media and entertainment as one of the hottest growth areas at a time when China’s overall economy slows to a growth pace of 5-6%.

Chinese communications and entertainment’s corporate champions are now world scale. NYSE-listed Alibaba has a market capitalization of $200 billion. Tencent is bigger still at $218 billion. That makes them bigger than the leading U.S. media conglomerates. Disney is currently valued at $162 billion. Time Warner at $61 billion. (Wanda is privately controlled, but has made chairman Wang Jianlin worth a personal $30 billion.)

Growing success at home in China has not yet been matched by equal international success for Chinese movies or Chinese media companies more generally. So corporate moves that potentially project Chinese culture and influence abroad are also likely to be treated favorably by Chinese politicians and regulators.

Wanda was widely assumed to have been given government blessing in advance of its $2.6 billion purchase of AMC Cinemas announced in May 2012. The deal was seen as large at the time and involved the outward remittance of substantial amount of capital. Now it seems modest.

As the number of China-Hollywood deals has increased since then, they have grown in scale and sophistication. They range from Lionsgate’s co-financing arrangement with Hunan Television, to Warner’s Flagship Entertainment joint venture with China Media Capital, through to the recent acquisition of Hollywood sales and finance house IM Global by Chinese interests.

That accelerating deal flow has seemingly made the full-blown acquisition of a Hollywood studio by a Chinese player a question of ‘when’ not ‘if.’

For the top Chinese companies their analysis was channeled by what assets might be available — and in that regard Lionsgate, Sony Dreamworks, MGM and Paramount appeared as among the most obvious large targets. But, even before negotiations could start or price could be discussed, each potential target presented different issues.

The problem areas included profitability, brand value, corporate control and strength of global distribution.

Lionsgate and Dreamworks are mini-studios that use deals with larger studios or employ arrays of output deals for releasing, as they do not have planet-wide distribution operations under their own control.

Wanda’s deal earlier this year to acquire Legendary Entertainment, which sees its output distributed these days through a deal with Universal, did not provide Wanda with global releasing capacity. And so, despite its $3.5 billion price tag, it was never likely to be enough.

Alternatively, a deal to acquire Sony Pictures, while it has global distribution capacity of its own, would mean a major transaction with a Japanese parent company. That would be highly problematic for a Chinese enterprise like Wanda or Alibaba as China and Japan remain political, cultural and economic rivals.

The announcement by Viacom that it was willing to sell a stake in Paramount was the clearest sign in recent years that one of the big six MPA members was for sale. And it was a signal of intent to which the Chinese entertainment companies and funds had to respond.

And while Paramount has its own worldwide distribution network, as well as a number of movie franchises capable of delivering global hits – notably “Star Trek,” “Transformers” and “Mission: Impossible” — it still represents two problems for the bidders.

First, the sale of a minority stake in Paramount, would not give the Chinese party the status of owning a Hollywood studio that it craves from the point of view of bragging rights. And it would mean that the larger Wanda is still the junior partner in a shark-infested sector.

Second, the feuding between the Redstone family and the Viacom board could mean that the deal is taken off the table at any time.

That would scarcely be a disaster for Wanda. The company currently appears to be in a hurry to get places quickly, but as a property developer it is well used to the concept of tactical setbacks along the route to a long term strategic goal.

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