Zhang Yimou Matt Damon The Great
Courtesy of Jasin Boland

Within a few short years, what had once been just talk of big deals between China and Hollywood has become an impressive reality, with a wave of major acquisitions such as Dalian Wanda’s $3.5 billion purchase of Legendary Entertainment and Alibaba’s equity stake in Steven Spielberg’s Amblin Partners.

But the floodgates now appear to be narrowing, due to political processes underway in both countries. While the deal-making continues — witness the recent announcement that China’s Recon group is shelling out $100 million for a 51% stake in Avi Lerner’s Millennium Pictures — observers say greater government scrutiny on both sides of the Pacific has begun holding up potential agreements that in the past would have sailed through.

On Friday, Dick Clark Productions confirmed that the $1 billion takeover agreement reached with Dalian Wanda has fallen apart, with DCP filing suit to receive the remaining $25 million breakup fee stipulated in the deal.

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In the U.S., a perceived Chinese takeover of American entertainment assets has alarmed politicians in much the same way that property purchases in the U.S. by Middle Eastern and Japanese firms aroused suspicion in earlier decades. Some lawmakers have called for an urgent review of Chinese investment in American media companies.

In China, meanwhile, regulators have stepped in to stanch a capital flight accelerated by the weakening of the renminbi. Last October, China’s State Administration of Foreign Exchange announced it was putting a halt to “exuberant” overseas deals, a clampdown that has especially affected transactions that are particularly large or represent unusual diversification beyond a company’s existing area of business.

The new regulations may have brought about the collapse of Chinese metals group Xinke’s bid for Voltage Pictures and torpedoed Wanda’s purchase of DCP; both acquisitions might have struck regulators as a step too far outside the buyers’ core business. The capital controls also reportedly helped sink a Chinese bid for control of MGM.

But the new regulations and political climate are likely not the only reasons for a slowdown in China-Hollywood deal-making.

“We have seen Chinese companies walk away from deals when they open up the books, do their due diligence, and find that the assets are not there or the business is not in the shape they previously believed it to be,” one Beijing-based financier told Variety, adding that, in such cases, “the capital controls are a very convenient excuse” to halt the transaction.

Moreover, Chinese companies like Alibaba and Wanda already own foreign assets and enjoy foreign revenues that could be used to finance their foreign M&A activity. Wanda used its U.S.-based (and dollar-based) AMC to acquire Carmike, British exhibitor Odeon-UCI, and the Nordic Cinema Group last year. With the real-estate giant’s assets pegged at $115 billion, it’s hard to tell why Chinese officials would consider Wanda’s purchase of DCP to be too big of a financial stretch.

Officials in Beijing could be using the new regulations as a way to pressure the Chinese entertainment industry to up its game on the creative and content side, rather than relying on overseas takeovers, co-productions, and corporate joint ventures to drive growth.

“The problem now recognized by the regulator is that Chinese companies are not making the films that the rest of the world wants to watch,” says Beijing-based lawyer Mathew Alderson at Harris Bricken. “We get a clue to this thinking from the TV sector, where TV formats have, since July last year, become taboo if the underlying IP is not Chinese-owned. The move is not anti-foreign but is rather about energizing inefficient, uncreative Chinese companies that are simply achieving growth through acquisition.”

This means that sensible deals with Hollywood — those that are correctly priced and relevant — are likely to pass muster with Chinese authorities. Indeed, there are talks underway, in the U.S. and elsewhere.

Besides Recon’s deal for Millennium — for a price significantly below Millennium’s $300 million asking price — China’s HeHe Pictures is buying sales agent Fortissimo from its Netherlands bankruptcy administrators and is in the market for other overseas assets. Chinese investors have been courted by Europe’s Wild Bunch. And respected Hollywood indie Good Universe recently held talks with Chinese backers on raising $50 million, though Good Universe chairman Joe Drake says those talks have run their course.

A closer relationship between international sales and production companies and Chinese players is logical, given the growing importance of the Chinese box office, particularly for certain kinds of movies.

Chinese grosses for Constantin’s “Resident Evil: The Final Chapter” and Revolution Studios’ “XXX: The Return of Xander Cage” outstripped those films’ takes in North America. Millennium’s “The Expendables III” made $73 million in China, about $33 million more than its Stateside haul.

A number of Western companies have linked with Chinese partners to expand their reach in China, the world’s second-biggest theatrical territory, after the U.S. Lionsgate has Chinese slate funding; Regency Enterprises has Chinese funding for a partial slate and saw “Assassin’s Creed” recently open to $18 million in the territory. EuropaCorp is 28% owned by China’s Fundamental Films, and IM Global is now owned by Tang Media.

For leading indie players, having a well-heeled Chinese partner to help with market access, finance, co-production, and marketing makes sense. So expect the deal-making to continue — but the fanfare to be less exuberant.

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