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STX Entertainment Chief Says Huayi Deal ‘Supercharges Our Business Plan’

Robert SimondsSTX Entertainment has succeeded where many other Hollywood players have failed by lining up a deep-pocketed Chinese partner, but the newly formed studio will not deviate from its mission of providing mid-budget fare to primarily American audiences.

“The main thrust of the deal does not change our original business plan,” the STX Entertainment chairman told Variety. “It supercharges our business plan.”

As part of the pact, China’s Huayi Brothers will co-finance at least 18 movies to be produced over a three-year period. Instead of getting a stake in STX, the Huayi Brothers will own part of each film they finance, across all revenue streams — from their theatrical release to any ancillary home entertainment deals.

This will allow STX Entertainment to expand its slate of movies from 8-10 films annually to between 12 and 15 movies. STX Entertainment will spend $750 million this year making, marketing and distributing its films, followed by $950 million in 2016 and between $1 billion and $1.25 billion in 2017, Simonds said. The films will cost approximately $40 million to produce and $35 million to distribute and market.

Having Huayi in the tent won’t alter the kinds of films the fledgling studio makes. It won’t be making Chinese-language films for Chinese audiences, for instance. It also won’t be allowed to bypass China’s quota on the number of foreign films it allows to show in the People’s Republic.

“These movies may or may not work in China,” said Simonds. “This is akin to Sony and the Japanese investing in Columbia [Pictures]. It’s not what DreamWorks [Animation] did in China.”

In other words, it’s not a joint venture like Oriental DreamWorks or Legendary East, where partners from North America and China look for ways to crack China’s burgeoning movie market.

By structuring the deal so it’s centered on a slate of pictures instead of selling an equity position, Simonds and his backers, a group that includes co-founder and private equity giant TPG, Hony and OddLot Entertainment’s Gigi Pritzker, don’t have to dilute their ownership stakes in the company.

“We get to reap all the benefits and we get a strong partner in China looking to expand themselves globally,” said Simonds.

The STX chief said the deal would not have happened without the involvement of Donald Tang, a close friend and a former vice chairman of Bear Stearns and chairman of Bear Stearns Asia.

“The reason a lot of these deals with China don’t happen isn’t because they don’t make sense,” said Simonds. “They do. They don’t consummate because they don’t have someone who can bridge the cultural barrier…Donald has this extraordinary ability to bring people together who left to their own devices wouldn’t figure things out.”

For his part, Tang said that the difference in this case was “you had executives at the respective companies who were decisive,” adding that “each party got what they wanted and had complementary strengths.”

Lindsay Conner, partner at Manatt, Phelps & Phillips, who negotiated the deal with STX on Huayi’s behalf, said he hoped it will be a model for the entertainment business.

“This is one of the first major investments by a Chinese media company in Hollywood films,” said Conner. “Indeed, it’s a bet by China on the performance of Hollywood films globally as well as in China. Over recent years we’ve seen a lot more deals discussed than closed. It’s good that people on both sides of the Pacific will see it’s possible to create successful partnerships.”

This spring has seen a number of mid-budget movies such as “American Sniper” and “Fifty Shades of Grey” break out in a big way, yet most major studios still shy away from films in that price range in favor of costly superhero movies that can inspire toy lines and other merchandising opportunities.

“Studios didn’t stop making these movies because they weren’t profitable,” said Simonds. “They were profitable 89% to 90% of the time…but the best use of their resources is to swing for the fences.”

“Making $30 million or $40 million on a movie for them doesn’t move the needle,” he added. “But if I make $30 million, 15 times a year, it moves the needle for me.”

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