The impending deal for Dalian Wanda group to buy a majority stake in Legendary Entertainment is poised to create a global entertainment powerhouse that would give China an even more significant foothold in Hollywood.
When the Chinese conglomerate acquired big U.S. movie theater circuit AMC Entertainment for some $2.6 billion in 2012, skeptics were quick to emerge. Who was Wanda? Why was it overpaying for an asset in such a financially challenged business? Did the company have the necessary finance to close the transaction? Did it have the ability to move that amount of capital out of China?
All of those initial doubts have now been answered as Wanda has embarked on a three-year expansion spree mixing up acquisitions and organic growth. The AMC purchase now looks positively puny beside the group’s domestic Chinese exhibition circuit, Wanda Cinema Line, which although smaller, has a market capitalization of $19 billion.
What has perhaps been less appreciated is just how far Wanda has already gone in its transformation from real estate developer to entertainment and leisure conglomerate. The significant stake in Legendary would not be Wanda’s first move into content, but would be its biggest and boldest. The valuation for Legendary, producer of such hits as “The Dark Knight” and “Inception” is understood to be in the $3-4 billion range.
Wanda, Legendary and existing minority shareholder SoftBank, which is also presumed to be a seller, all declined comment.
Like other Chinese players, Wanda has wanted to have a presence in Hollywood for several years. Its chairman Wang Jianlin has previously made statements about buying either Lionsgate or MGM, and is understood to have looked into acquiring DreamWorks. (Lionsgate last year tied up a major production finance deal with another Chinese company, Hunan Television.)
While it has been poring through the books of those companies, Wanda has also been eyeing film projects in Hollywood. Progress here has been slower, with indie boxing picture “Southpaw” its most recent co-investment. Legendary, which had a mixed 2015 with hits including its 25% interest in “Jurassic World” and flops including “Black Hat,” has a pipeline of movies going forward several years, and would represent a major scaling up.
Owning the majority of Legendary would be transformational, not just for the two companies concerned. It would be the first time that a company whose stock-in-trade is the tentpole movie business is owned by a Chinese parent.
After unhappy endings for a succession of Middle Eastern, Japanese, and German investors in Hollywood studios, Chinese companies, which have been so obviously the next wave of investors, have been eager to proceed, but careful not to lose face, or trip up. Buying Legendary would put Wanda into the studio league, but avoid it having to take a run at one of the six majors.
Together Wanda and Legendary have the potential to further accelerate an existing trend in Hollywood that sees the incorporation of creative elements intended to please Chinese audiences – through casting, scenes, and subplots – and to avoid enraging Chinese censors.
A Wanda-owned Legendary would likely be better able to hatch China-U.S. co-productions that avoid China’s import quota restrictions, and structure co-financing deals. However, there are a myriad of practical stumbling blocks that have made such tie-ups slow going until recently.
With a majority interest in Legendary, Wanda would acquire the capacity to produce content in, and for, the U.S. and China. At the same time, ongoing ownership of Wanda Cinemas and AMC Entertainment might be expected to augment this production capacity with a parallel theatrical exhibition reach. “All of this will be taking place in the biggest and second biggest box office markets in the world,” says Mathew Alderson, partner at U.S and China-based law firm Harris Moure. “Producing content with simultaneous appeal in both markets will remain an ongoing challenge. Other challenges would include the integration of production and theatrical exhibition in a single business in either market, not to mention coordinating activities in both markets.”
For Legendary, one of the most obvious benefits of a deal would be Wanda’s deep pockets.
As a private company it does not have the same access to equity or debt finance that the major Hollywood conglomerates enjoy. And, as essentially a production company devoid of the studios’ distribution engines, Legendary remains hit-driven and vulnerable to the impact of flops such as “Seventh Son” and “Black Hat.”
Legendary has looked at shoring up its finances, and reportedly considered an IPO. It has also previously looked to China for cash. In 2010, Hong Kong businessman Kelvin Wu engineered a deal in which exhibition chain Golden Harvest acquired a small minority stake for $25 million. It sold its interest a year later for $30 million, which helped establish a dollar value for the unlisted Legendary. Later in 2011, Legendary was in advanced talks with Hong Kong construction firm PY Engineering to be the principal financier of Legendary East, Legendary’s new Chinese offshoot.
While that deal collapsed, Legendary East is now in post-production on its first movie “The Great Wall.” Directed by China’s Zhang Yimou from a story idea originally hatched by Legendary’s CEO Thomas Tull, the $150 million picture is straight out of the Legendary playbook, targeting a global fan-boy audience with a high concept fantasy pitch and copious CGI.
What differences would be made to Legendary’s global releasing relationship are unclear. Two years ago Legendary switched from one studio-level deal with Warner Bros. to another with Universal. Insiders have hinted that that the fit is much better, given Universal’s mix of product.
A Wanda-backed Legendary might be in a position to put up greater proportions of the financing for its own movie slate and to cut a better deal with Universal.
The idea that Legendary might one day self-distribute Hollywood-level studio movies is not entirely far fetched, especially if Wanda continues to expand its cinema operations outside China. In 2015, Wanda paid over $600 million for Hoyts, Australia’s number two multiplex chain, and it was rumored to have toyed with buying the pan-European UCI chain.
Wanda is increasingly ready to take on global challenges. It has hotel, office and commercial properties in the U.K., U.S., Spain and Australia and this week there are reports of a $1 billion outreach into Haryana, India. In 2014 it bought the former Robinsons-May department store site in Beverly Hills, which at the time it said it would use as the global headquarters for its entertainment business. If that is still the intention, the building project looks prescient.
In 2014 Wanda set itself the goal of becoming a true multinational with assets of RMB1 trillion (US$153 billion), annual revenues of RMB600 billion (US$92 billion) and net income of RMB60 billion (US$9.2 billion) by 2020.
And to get there Wang is reinventing his empire, transforming it from a property behemoth into a “services conglomerate.” Wang has come up with an “assets light” concept which puts more emphasis on software and content than infrastructure. He says that the group is now focused in four areas: commercial properties; culture and tourism; e-commerce and department stores.
A recent note circulated to Variety shows further organizational change, creating three branches — commercial properties, finance and culture. Of these culture has the most subsidiaries, spanning theme parks, the massive Qingdao Studios currently under construction on China’s East coast, Sunseeker Yachts, and Wanda’s $2 billion 2015 purchases of sports rights groups Infront and World Triathlon.
A revamp of the film unit late last year put former Microsoft and News Corp. executive Jack Gao in charge of a movies unit that spans multiplexes, film production (Wanda Pictures) and releasing in China (Wuzhou Film Distribution).
Legendary, with its branded content and Hollywood prestige, offers Wang and Gao the potential to further push Wanda’s vertical and horizontal integration. Legendary’s properties lend themselves well to exploitation as theme parks and mall rides, the Qingdao Studio facility could become Legendary’s default shooting location, while Wanda’s anticipated growth in e-commerce and streaming video would benefit from Legendary as a provider of exclusive content.