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China Pulls Rug Out From Under Wanda as It Plans Restructuring Ahead of IPO

Dalian Wanda has survived setbacks before, like the time Chinese stock-market regulators tried to slow down its flotation of Wanda Cinema Line. The real estate giant responded with an IPO the following year that gave its multiplex business a market capitalization several times that of AMC, the North American theater group Wanda acquired in 2012.

This time, though, Wanda’s ability to bounce back may be facing its gravest challenge yet. Documents emerged this week suggesting that financial regulators in China have ordered the country’s banks to stop lending money to Wanda for the financing of six of its overseas acquisitions — a serious jolt to a company that had its sights set on Tinseltown glory. At least four of the deals, including the $3.5 billion purchase of Legendary Entertainment, have already closed. But the ban appears to prohibit loans even to those units for day-to-day operations or for restructuring.

A Hong Kong newspaper said Wanda was being punished for breaching capital controls imposed by Beijing late last year — controls that looked tailor-made to sharply limit Wanda’s expansion into overseas entertainment, hotels, property and sports.

Whatever the motive, the government’s message is clear: Unconventional dealings such as off-balance-sheet borrowing or building up stakes in American movie producers and European soccer teams — all of which Wanda has done — are a no-go under the straitlaced regime of Chinese President Xi Jinping. And in the near term, Wanda will have to concentrate on getting its house in order before contemplating another great leap forward.

“It is very difficult to see clearly what is happening and to know what the next steps will be,” said Castor Pang, head of research at investment broker house Core Pacific-Yamaichi Intl. “The company needs some good news either of its own making or from the government in clarifying the reports.”

Word that lending was being cut off has cast new light on the conglomerate’s announcement last week that it was selling its theme parks and more than 70 hotels to fellow property developer Sunac China. Dalian Wanda chairman Wang Jianlin said that the $9.3 billion sale would help clear the company’s debts by the end of the year.

By the Numbers
10% Wanda’s share of the world’s cinemas
$3.5b Amount Wanda paid for Legedary Ent.
$40b Wanda’s annual revenue

But two things count against this deal. First, it represents a sale of Wanda’s Chinese assets, not its troublesome overseas businesses. Second, it involves selling assets to a weaker company, and entails more than $4 billion in vendor financing arranged by Wanda on behalf of Sunac.

Sunac’s credit rating was immediately downgraded. S&P cut the investment grade of Wanda’s debt on July 17. And on the following day, AMC issued a statement declaring that none of its recent acquisitions, such as its purchases of Odeon & UCI Cinemas and Nordic Cinema Group, relied on any funds from Wanda or from Chinese banks. Legendary said in a statement it is “well capitalized” and “has not experienced any change in its relationship with Wanda.”

Wanda plans to restructure its film business, details of which are to be unveiled by Aug. 3. The retrenchment is likely to see listed firm Wanda Film acquire unlisted Wanda Pictures and then recapitalize with new shares. The plan counts on Chinese investors, who are still enamored of entertainment assets, to lap up stock.

Now, said Pang, “that will be difficult to achieve through a share placing. … Being put on the watch list by S&P will make it harder to raise money.”

And it looks as though parent group Dalian Wanda, which is privately held, will have to keep L.A.-based Legendary as a separate entity, instead of rolling it into Wanda Film. The mini-studio once co-financed hits such as Warner Bros.’ “Inception” and “The Dark Knight” but has stumbled of late and remains leaderless following the exit of founder Thomas Tull and China CEO Peter Loehr. That leaves Wanda in the unenviable position of operating a loss-making boutique in Hollywood, where it still has limited experience.

Yet Legendary is only a symptom of Wanda’s problems, not the cause. “Seen from L.A., what happens at Legendary and who they appoint as its new boss is a big deal,” one former Wanda employee
said on condition of anonymity. “But the reality is that Legendary is so much smaller than Wanda Film that it’s a distraction from the much bigger picture.” The “bigger picture” is Wanda’s goal of
transitioning from being a real estate developer to pursuing an “asset-light” operating strategy, with entertainment and tourism as major components. That’s fueled the company’s overseas spending spree on cinema chains.

But this week’s developments show that the transition is proving much harder than expected. In China’s newly toughened business environment, even someone as rich and connected as Wang, it appears, is not immune to the forces of political and financial gravity. And even mighty Wanda is not too big to fail.

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