Now was supposed to be a happy time indeed for STX Entertainment. If all had gone according to plan, “The Happytime Murders” would have been a smash summer hit and the studio would be laughing all the way to the bank with a successful IPO under its belt.
But the Melissa McCarthy movie tanked at the box office, pulling in only $25 million worldwide despite costing $40 million to make. And the planned IPO on the Hong Kong stock exchange is stuck in limbo, with the soonest a listing could take place pushed back to November, well past its end-of-summer target date.
Those setbacks have conspired to cloud the picture for STX as the company tries to make good on its promise to usher in a new way of doing business in Hollywood. Founded in 2014 and touted as a fully baked content and distribution engine, the studio has seasoned U.S. executives such as Robert Simonds and Adam Fogelson in charge, and boasts of strong partnerships in the growing Chinese market. But so far, STX has few big winners to its name in a library of more than 20 titles, and its aspirations in greater China are running into roadblocks.
The IPO was to be a validation of its performance and prospects, making STX the first U.S.-based entertainment business to list on the Hong Kong bourse. The company filed a draft prospectus in April, but is still waiting to be summoned by market regulators to a mandatory listing hearing. Even if that were to happen now, the subsequent process of publishing a final prospectus, arranging local and international underwriting, going on an investor roadshow and setting final terms would push the IPO to November at the earliest. A 2016 funding round gave the company an implied valuation of $1.55 billion. More recent guesstimates circulating in Asian financial circles increased the target valuation to $3.5 billion, including some $500 million of new capital to be raised.
Why the Hong Kong exchange’s vetting process is taking longer than usual is unclear. But it has left STX sitting on its hands in frustration.
External factors could be at play. The Hong Kong equity market is currently trading more than 20% below its peak, although that hasn’t stopped it from regaining its crown as the world’s top IPO venue this year. Also, the escalating trade war with the U.S. could mean that Beijing is pulling levers to make life more difficult for American businesses in greater China. That could include the entertainment, media and digital spheres, which the Communist government has made moves in recent weeks to bring more firmly under its control.
“The entertainment industry is not a problem area for the government,” says Mathew Alderson, a China-based attorney at U.S. law firm Harris Bricken. “But in contrast with the pre-2014 era, when there were no regulations for the online sector, it is now one that is being taken seriously.”
There is also the question of STX’s readiness to be a public company. It has been stung by criticism, mostly emanating from the U.S., that it is not yet mature enough. The draft prospectus shows revenues in the financial year ending September 2017 reaching $201 million, with losses of $11.8 million. In the following quarter, revenues climbed 41% year over year to $93 million, but losses stood at $28.1 million. Net cash remains at close to $100 million.
“We just finished our fiscal 2018 more than doubling our global revenues across all lines of business, and we finished the year with positive cash flow,” STX’s chief financial officer, Andy Warren, said in a statement. The company is restricted from extensive comment while it awaits the green light for its IPO.
STX’s track record has been mixed. It has had hits in 2016 comedy “Bad Moms,” which grossed more than $180 million worldwide on a $20 million budget. While an announced spinoff film, “Bad Dads,” never materialized, short-form “Bad Moms” content and consumer products were produced and rolled out.
Last fall’s “The Foreigner,” a U.S.-China co-production that STX boarded at script level and produced for $35 million, fetched $34 million domestically but earned an impressive $111 million worldwide. The studio also had a prestige run with Aaron Sorkin’s “Molly’s Game” and Kelly Fremon Craig’s “The Edge of Seventeen.”
But the rest of the slate has been middling, especially a recent push into star vehicles such as Amy Schumer’s “I Feel Pretty” and Jennifer Garner’s “Peppermint.” The dismal performance of “The Happytime Murders” was a huge disappointment.
STX also has interests in virtual reality and television. It co-produced Katherine Heigl’s NBC drama “State of Affairs,” which flopped. More promising is its upcoming pact with “Crazy Rich Asians” author Kevin Kwan and an unscripted adaptation of “Bad Moms.”
“The Foreigner” offers an example of one of STX’s self-promoted strengths: the ability to leverage relationships and savvy in China. The company’s second-largest shareholder, with a 22% stake, is Hony Capital, which is run by highly respected financier John Zhao. Chinese social media giant Tencent and Hong Kong media empire PCCW have more modest stakes, a combined 6.2%. STX’s 11-person board of directors includes five members who are ethnically Chinese.
“We do not simply export Hollywood content into China,” the STX prospectus asserts. “Rather, we aim to integrate China into the development process in a meaningful way. Our partnership-based approach is to marry Hollywood’s storytelling know-how and global distribution with prominent media players creating content across platforms in China.”
Co-ventures in the pipeline include three with Alibaba Pictures: “Ugly Dolls,” an animated family franchise set for mid-2019 release; “Warriors,” a young-adult fantasy franchise being developed by David Heyman; and “Steel Soldiers,” a Robert Zemeckis-directed sci-fi actioner. Two more projects are set with Tencent: “Killer’s Game,” a Jason Statham action thriller, and “Zombie Brother,” a comic-book adaptation produced with Channing Tatum’s Free Association.
But STX’s China relations could now be at a pivotal point.
Under a three-year slate financing deal, powerful Chinese studio Huayi Brothers provided 7.5% of STX’s production finance. In return, Huayi earned a proportionate share of revenues and helped with marketing and distribution of STX titles in the China theatrical market. But the deal is set to expire at the end of this year and is unlikely to be renewed in its current form.
“We aim to integrate China into the development process in a meaningful way.”
A Huayi source, who was not authorized to speak officially, told Variety that talks between the two companies are ongoing. “It is not clear what form or forms the relationship will take, but we expect to continue to work on projects agreed to under the current deal,” the source says.
Another deal, with U.S.-Chinese businessman Donald Tang, whose Global Road recently filed for bankruptcy, was richer still but looks finished. That deal saw the Tang Film Financing Fund provide 25% of STX’s production finance on projects selected before the end of 2017.
For STX’s “partnership-based approach” to continue, it will either need to find more Chinese partners or initiate more of its own projects in China. It currently has no office on the Chinese mainland but expects to remedy that in the near future.
STX is also seeking to expand in China by using a portion of its eventual IPO proceeds for acquisitions. Executives believe there are movie and TV projects to be had cheaply, and see an opportunity to buy into young Chinese animation companies.
For now, the IPO is a waiting game. Industry players who have accused STX of hubris may smirk at the delay, but Chris Fenton, a trustee of the U.S.-Asia Institute and former co-head of DMG, thinks Hollywood should be rooting for the listing to succeed.
It would “showcase a thriving collaboration between name investors on both sides of the Pacific and give a necessary respite from negative headlines out there defining the complex U.S.-China relationship,” Fenton says. “An IPO would strengthen a stand-alone studio in a rapidly consolidating business.”