by Robert Cain for China Film Biz
May 13, 2012
Another major announcement from China got Hollywood talking last week when Dalian–based Wanda Cinema Line revealed that it has initiated discussions to acquire the 5,048 screen U.S. cinema circuit AMC Entertainment.
The notion of a Chinese company controlling America’s second largest theater chain took many by surprise, and raised lots of questions. But before we speculate too much about what changes a Chinese operator would bring to U.S. movie theaters, a more immediate question comes to mind: does this deal even make sense? Would Wanda truly benefit from owning AMC, or is this merely another example of Chinese chest-thumping that will ultimately amount to nothing?
Let’s look at the following facts:
1. AMC will be costly. U.S. cinema stocks have been on the rise this year, with all three of the publicly listed national theater chains trading at or near their 52 week highs.
It has been widely suggested that AMC’s valuation is $1.5 billion, but that figure would put the company at a value of less than $300,000 per screen, far below the level of the two other large, publicly traded national chains, Cinemark ($711,000 per screen) and Regal ($595,000). Even though AMC was unprofitable last year, losing $83 million on revenue of $1.93 billion in the 39 weeks ending December 29, 2011, its profits have likely bounced back with the strengthening of the U.S. box office in 2012. Given recent market trends, Wanda would likely have to pay top dollar for AMC.
2. Acquiring AMC would be dilutive. Wanda is a market leader in one of the fastest growing, and for the foreseeable future, one of the most profitable cinema markets in the world. China has been growing at an average rate of 35 percent annually, and with 200 million more people forecast to join its upper-middle and affluent classes in the next five years, it will continue to grow rapidly. Ticket prices in China are high, labor and operating costs are low. Government regulations protect exhibitor margins, and keep foreign players out.
The U.S., on the other hand is a completely saturated, highly competitive, slow- to no-growth market, with average profit margins in the low single digits. The future upside for AMC is marginal, with few organic growth prospects and only a few interesting acquisition opportunities available. Given the ability to easily expand and perhaps dominate in a sizzling hot territory like China, why would Wanda invest at least $1.5 billion in the stagnant U.S. market?
3. AMC would not be strategic. One of Wanda’s stated justifications for the AMC acquisition is that it would guarantee the company U.S. exhibition for the movies that it produces.
This is just plain silly. First of all, while Wanda does have a film production division, it has yet to produce a single film. Secondly, unless they also plan on buying Lionsgate or Paramount, there is no way they’re going to be able to consistently make movies that anyone in America will pay to see. To pay $1.5 billion or more to have a U.S. outlet for a fledgling Chinese movie division makes about as much sense as it would to buy an entire parking lot just to be sure you’d have a place to park your horse and buggy.
Another presumptive rationale for the deal would be the potential gain in negotiating leverage Wanda would accrue from owning so many theaters. But the terms for acquisition, import and distribution of foreign films are already set by the Chinese government and they are highly favorable for domestic companies. Wanda wouldn’t gain anything here. It might gain a bit of leverage vis a vis equipment vendors, but as China’s largest player in a market that foreigners are eager to serve, Wanda already has a substantial negotiating position. Again, this looks like a specious justification for acquiring AMC.
4. The deal would be complicated. AMC is privately held, with four large private equity players—Apollo, Bain Capital, Carlyle Group and JPMorgan—among its largest shareholders. Getting these diverse investors to work in concert and agree on terms will likely be a long and complicated process, unless Wanda consents to significantly overpay for the acquisition.
5. The deal could get political. With Wanda’s billionaire Chairman Wang Jianlin already in the media spotlight due to his close dealings with disgraced politician and Politburo member Bo Xilai, a major investment in America’s cultural industry could bring Wang additional unwanted press scrutiny, and possibly attention from the Securities and Exchange Commission as well. Although there are no legal prohibitions against foreign ownership of a theater chain, American lawmakers and moviegoers might not be happy to see a Chinese company establish a dominant position in such a symbolically important business as the movie industry.
With no apparent strategic upside and so much potential financial and political downside, it’s hard to see why Wanda would want to pursue this acquisition. The deal would make infinitely more sense if it were going the other way, with AMC buying Wanda. But given AMC’s already heavy debt load and an imposing set of Chinese regulatory hurdles, that’s not likely to happen any time soon.
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 and at www.pacificbridgepics.com.
You gave a thoughtful analysis but let me mention something you may have overlooked.
Unless I am mistaken about Chinese business, Wanda and the government are very tight, despite the scandal. This acquisition was likely in the planning stages before the news broke and even before the murder of the Brit confederate.
The Chinese government, which is to sway the enitre film industry there has been eagerly pursuing American productions partners, to make films there with American star and American capital. This is to strengthen the global appeal of a Chinese made film, to bring status to their business and to conitnue to modernizing tendancy of th CHina as world world economy.
Haveing a strong toehold in an American theatre does indeed give them a more friendly outlet, althought not guranteed as you say, but you fail to achnowledge that it is an additional chance to profit from films made on the mainland. It is vertical integration on a global scale.
The CHinese do nothing in a small way. This is a bold stroke to match the deals they make with American producers. They would make studios pay a high fee to distrubte in CHina, but this reduces their cost of exhibition in the US with assets their domeestic policies already make lucrative for themm financially and in the court of global opinion.
Thank you, I appreciate your thoughtful comment. But I must respectfully disagree. In the AMC post I clearly addressed the notion of “buying” distribution for Chinese films. It won’t work. ‘China’ can buy a whole 5,000 screen theater circuit and use it as a pipeline for Chinese movies, but the result will be that very few people will show up for those films. Even Chinese audiences in China are largely staying away from Chinese-made movies. Most films made there are simply not worth watching, for a host of reasons I outlined in a previous China Film Biz post. The average Chinese-made film released in China this year has grossed $3.8 million; the average American film released in China has grossed 10 times as much, $38 million.
Indeed, AMC already has a deal with a Chinese distributor, China Lion, to screen Chinese-made films in Chinese speaking neighborhoods around North America. Even in these highly targeted neighborhoods, the strategy has failed. Almost every one of these films has drawn miniscule audiences.
Buying theater chains wouldn’t reduce China’s cost of exhibition in the U.S., it would drastically increase the cost. Until China figures out how to consistently make movies that people want to watch, it won’t matter how many screens they own, or how many ways they have available to distribute them. Just because you can put a product in front of people doesn’t mean they’ll buy it.
Interesting analysis, Rob. On your 3rd point, I actually think it could be strategic for Wanda to make the acquisition — which will likely make Wanda more appealing to the Hollywood studios as a candidate to distribute their films in China.
And on a separate note, it just made the news that Fox’s parent News Corp. announced they will buy 19.9% of China’s Bona Film… I suspect there will be more of such deals coming and this is merely just the beginning…
Thanks, Ed. Since Fox already has a Chinese language production capability and track record with Sanford Panitch’s division, Fox International Pictures, it will be interesting to see how they leverage their new ownership in Bona.
It is logical that Chinese companies want to expand their presence in other countries, such as America. But in terms of the film industry, the money would be better spent on developing domestic movies that have a broad global appeal. And that means getting away from films like Flowers of War–and providing film makers and screenwriters with more creative support.
Kent, exactly. Not an easy thing to do, but it is what Chinese filmmakers must do if they’re going to have any international success.
Rob, I am inclined to believe that this announcement, which lay dormant for nearly a year, is a pure PR play by Wanda. Afterall, how many Chery vehicles do you see on the U.S. roadways? In 2007, Chery made a headline announcement that it intended to “crack the U.S. auto market in the next few years” (Washington Post, 2-02-2007). Similarly, Chinese designers (notably Shang Xia and Shanghai Tan) boast that homegrown luxury brands wILL become commonplace globally (Forbes 11-02-2011). Name one. You have tracked the braggadocio of the pretend US studio buyers from China, who seem to fade as quickly as the Chinese films released in the US.
Gary, I’m inclined to agree with you. The unfortunate result of all this bogus PR from Chinese companies is that they have created a China backlash among potential American partners who feel they’ve wasted too much time with Chinese pretenders. It makes my job and yours, as reliable dealmakers who act with integrity, much more difficult.
Thanks Robert. I must say that I like the “plain silly” line and agree with all your comments. I doubt this is pure PR though, it is just pure stupidity. This kind of initiative (if it was true) would make us doubt once again about the capability of China to sustain a long term development. All this may just well be… a X-year positive economic cycle before the country goes back to sleep again. In any case, your last line is the most important: this nonsense makes our life more complicated.