By Robert Cain November 17, 2011
In an announcement that was remarkable for its candor and for the amount of detail disclosed, Hong Kong construction firm Paul Y. Engineering (PYE) revealed on Tuesday the terms of its $220.5 million investment in Legendary East, Ltd., the film co-production joint venture that will be co-owned and managed by Legendary Pictures and Beijing based Huayi Brothers.
The joint venture aims to produce two films per year through 2017, and three per year thereafter, to be shot in English and “based on Chinese culture, mythology and history, with a view on distributing globally,” according to PYE deputy chairman Tom Lau. By qualifying these films as locally made ‘national productions’ the company will be able to avoid China’s stringent import quotas so that it can freely distribute in China.
Outside of China the films will presumably be released by Legendary’s studio partner Warner Brothers, though there has been no official announcement about that yet.
PYE, which has no prior experience in entertainment, will retain a 50 percent stake in Legendary East, with Legendary Entertainment taking 40.1 percent and Huayi Brothers 9.9 percent.
PYE explained its investment as an effort to diversify its business into a more profitable industry sector with less cyclicality than its core construction operation. Although PYE has been a major player in shaping the skyline and infrastructure of Hong Kong over the past six decades, it presumably sees China’s booming film industry as a more promising area of growth and profitability than its traditional business of building skyscrapers, airports and tunnels.
The terms of the deal appear to be very favorable for Burbank based Legendary, which maintains a great deal of control while shouldering little risk. In assuming the chairmanship of the new venture, Legendary Entertainment’s chairman Thomas Tull will control the company’s board of directors and he will exercise full greenlight authority, but will take on little to no financial exposure.
Minority partner Huayi Brothers, on the other hand, appears to be hungry to participate because it will make substantial sacrifices for its relatively small stake in the deal. In exchange for its right to distribute Legendary East films throughout the mainland and greater China, Huayi Brothers’ will be required to:
- Give Legendary East films ‘first priority’ over its own titles by carving out a two week blackout period ahead of each Legendary East film during which time Huayi will be prohibited from releasing any other films.
- Put up a minimum of 5 percent of the negative cost of each joint venture film, with budgets set at a floor of $50 million and a cap of $150 million.
- Invest 100 percent of each film’s P&A, while limiting its distribution fees to 11 percent.
- Shoulder the responsibility of taking each script through the government’s censorship hurdles, production approval process and distribution license authorization, in return for which it will earn producing fees of $500,000 per picture.
For its part, U.S. based Legendary Entertainment will take a $3 million producing fee from the budget of each film.
The partners had previously announced that their first joint production would be The Great Wall, to be directed by Edward Zwick (The Last Samurai; Blood Diamond) and based on a screenplay by Zwick and Marshall Herskovitz. Other early Legendary East investments will include co-financing two existing Legendary projects: Paradise Lost, to be directed by Alex Proyas (Dark City; I, Robot) and star Bradley Cooper; and Seventh Son, which will be directed by Sergei Bodrov (Mongol) and star Jeff Bridges.
In a curious display of candor, PYE Chairman James Chiu seemed to go out of his way to explain how little he knows or even cares about movies.
“I have no patience to sit in the cinema for two hours,” he is quoted as saying.
With $220 million at stake, perhaps he can be persuaded to show up and sit through a premiere or two for the company’s benefit.
Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at firstname.lastname@example.org.
Amazing! But are they kidding us about this deal? This sounds incredibly one sided and unfair on the non-US participants at the outset. Any deal that brings windfall benefits to the low risk taker, while exposing the biggest investor to the maximum is bound to fail. Just the karma of this sounds notoriously like some day there will be payback for hoodwinking PYE and Huayi Brothers. Maybe PYE can afford to spend this 220 mil on educating themselves, but knowing the Chinese, they will learn fast – perhaps well before the 220 mil is spent. Where can I place a bet on this?
Seems very much like Wall Street hedge funds getting their fingers burnt in film. Looks like there are plenty of hurdles for those films with the stringent terms Huayi Brothers accepted.
Great article/analysis Rob! I tweeted out on my twitter account- FlanniganWill
I’m wondering what tax credits and offsets they will get in China. Maybe this offset will go to Legendary and they don’t care if the films make any profit at all.
Will this start a trend in film making in China using more foreigners.
Russell, there are no official government tax incentive programs in China. The main benefits for Legendary East to shoot in China are the somewhat lower labor costs (though these have steadily risen for years), avoidance of the quota restrictions, and access to a fast growing market. Product placement, when appropriate, can also significantly offset the budgets of Chinese films.
Certainly understand their reasons for producing here, I’m sure I saw a State film fund being set up for Chinese productions on CCTV english Culture express that was also going to give tax incentives, maybe six months ago.
If true, this does sound like a good deal for Legendary, but also reminds me of what happened to WB a few years back: going into partnership with China’s Wanda Group to build state of the art cinemas on a deal considered too good to be true, only to get railroaded out of China once things got going and have everything taken over by Wanda, who’s now the top ranked cinema circuit in China. Sincerely hope it’s not deja vu all over again…