by Robert Cain for China Film Biz
May 23, 2012
Dalian Wanda, the $16 billion private Chinese conglomerate that operates in the commercial real estate, culture & entertainment, and retail industries, announced on Sunday that it has signed an agreement to purchase AMC Entertainment and its 5,048 screen North American theater chain for the sum of $2.6 billion. Wanda has indicated that it will also spend an additional $500 million on theater renovations and technology upgrades.
Last week I laid out a detailed argument that the acquisition doesn’t appear to make much sense for Wanda. Now that a deal has been announced I still don’t see any compelling business reasons for it. The rationales offered by Wanda’s billionaire chairman Wang Jianlin have so far been unconvincing, the following being representative of his statements:
- “We want to be a big company, not just in China but in the world.”
- “This transaction will help make Wanda a truly global cinema owner”
If there were competitive advantages to becoming a very big global player in the cinema business, someone would have done it before. Size alone, and global reach, offer no discernible strategic advantages in a business whose customers’ movie-going choices are purely local ones. There may be some scale economies such as increased bargaining leverage in dealing with suppliers of films, equipment, and popcorn, but these hardly justify paying a peak market price for an aging cinema chain with limited growth prospects and low profitability.
The opportunity costs for Wanda are huge. The $3.1 billion they’re spending on AMC could instead have acquired or built thousands of Chinese and Asian cinemas. Wanda could have chosen to amass a huge market share in a very fast-growing, profitable territory. But they didn’t.
So what, then, are Wanda’s true motivations for buying AMC? How does Wang Jianlin benefit? Herewith, a few theories.
The AMC purchase might simply be a vehicle for Wanda to move a large sum of money from “soft” Chinese currency into hard American greenbacks. Theaters are a cash business, and Wanda could eventually take AMC public, which would be a nifty way for the company to shift a chunk of its asset base and grow it in the relatively safe haven of the U.S.
Wanda Group is widely expected to go public with its own IPO in China later this year. The AMC acquisition gives Wanda a bit of international sex appeal by instantly making it a global ‘Hollywood’ company, and provides fodder for its road show pitch to prospective IPO investors.
Location, location, location
Dalian Wanda, the parent company of Wanda Cinema Line, is mainly in the business of commercial real estate in China. And commercial real estate in China hasn’t been a very appealing business lately, with government regulation, tight debt policies, and a slowing economy all contributing to a downturn in the sector. So Wanda may see the U.S. as a better bet than China for its real estate development business, with AMC serving as a beachhead to help it launch new hotels, offices, and entertainment properties. We’ve already seen one hobbled Chinese real estate company, Paul Y Engineering, attempt, unsuccessfully, to invest in a U.S. media company as a way of shifting its business and geographic focus. But unlike Paul Y, Wanda already has a presence in the movie business.
Political troubles at home
At least part of Wang Jianlin’s business rise can be attributed to his close dealings with disgraced politician Bo Xilai, who was once the party chief of Dalian, where Wanda is based. Although Wang denies he is being investigated, he must be thinking about the possibility of future political fallout from the Bo scandal. AMC will give him a nice business escape hatch if he needs it.
AMC could serve as the first element of a vertical integration strategy under which Wanda would get into financing, production and distribution of Hollywood style films for the global market. Wanda has already begun to develop and produce films in China, and an understanding of how both the U.S. and Chinese markets work will become increasingly valuable, as the two film markets combined will likely account for about 40 to 45 percent of total world box office receipts by 2020.
I may be going out on a limb here, but the fact that Wanda will now have a major beachhead in the world’s most important media market could greatly enhance Wang Jianlin’s standing with the Communist Party. The party leadership has repeatedly emphasized the critical importance of soft power initiatives, especially in the west, and with AMC Wang will now have China’s largest mouthpiece in the U.S. It’s unlikely that AMC theaters will be running the Chinese national anthem before screenings of Communist Revolution-set propaganda dramas any time soon, but Wanda can now credibly proclaim that it’s leading the charge in spreading Chinese values to the west.
Of course, Wang’s motives might be much simpler than all of this. As James Marsh, an entertainment industry analyst at Piper Jaffray & Co. put it, “I think this is more of a vanity purchase than anything else.” And he may be right.
Wang has granted an interview to at least one major U.S. newspaper this week, so we may learn more about his thinking in the coming days.
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.
If you’re looking to build your business in China, Pacific Bridge can help. We have more than 50 years of combined experience in developing, financing, and producing films in China and Hollywood, and a uniquely valuable set of relationships and skills to help entertainment and media companies formulate their strategies and achieve their goals in China.
Interesting analysis… great article….
Thanks for your feedback, Todd!
Not only am I pleased to see comments that are actually premised on present day commercial realities but I am impressed with the presentation of the multilayered issues that led to the decision to invest. Given the uncertainties of the market in the US and the inexperience of Wanda, the test has to lie in the eating.
Rob, you have done a great job with this piece. There should be many out there who would like to read your analysis with this deal and others.
Jesse, thank you, your feedback means a great deal to me.
Excellent analysis of the possible genuine motives, Robert. All have a relatively reasonable possibility, and you presented insightful options.
Thanks, Rob. It’s all speculation, of course, but I’m sure there are ‘big picture’ motivations for Wanda that go well beyond the movie business.
All good theories and possibly a mix of all those reasons are behind this decision of Dalian Wanda. I found an immediate correlation to India’s Tata Motors acquiring Jaguar Land Rover in the UK. It made no economic sense at all for a strong player in India with many prospects in growing economies to acquire two loss making brands in the UK for US$2.3billion. The reason Ratan Tata gave was that they wanted to increase their foreign currency income. “Sure, but at the cost of making losses?” – many asked.
To this day, it is felt that this is Tatas’ polite thumb in the nose to the Brits, given their history of entrepreneurship and wanting to enhance India’s image. “Soft power” is immense, for it provides subtle changes of perceptions that would otherwise cost a great deal more than the business deal that cascades those perceptions. Wanda may be onto something huge here, that might be beyond measurable parameters.
So, does Tata sell Jaguars and Land Rovers in India now? Of course they do, but very few on the road yet. Millions of their other cars though!
Thanks, Senthil, for your excellent insights. Interesting about Tata’s motivations. I don’t think the Wanda case is a thumb in the nose so much as a flexing of corporate muscles. Wanda shows off its strength and suddenly has the entire movie world abuzz.
Yes indeed Rob! Wanda’s motivations don’t seem to have anything “personal” about them. I needed to elaborate. The Tatas under British rule (in colonial India) harbored many ambitions for Independent India. Famously, their Tata Airlines became Air India, with huge government participation. Their acquisitions of Corus Steel and Jaguar Land Rover were expressions of the growth of Indian enterprise as much as they were business decisions. But many business heads I meet to this day feel there was more than business sense involved in taking aim at acquisitions in the UK. The Chinese though are investing themselves heavily wherever they see an opportunity, and not just a commercial opportunity! I get reports from Africa about their growing presence there too. Cheers!
It occurred to me too that it might be more a political move for greater influence over American/Western distribution channels. As you suggested, it’s not that there will be a sudden glut of Chinese films exhibited, but a few simple choices of “this, but not that” can make a big difference over time. And do you think there could be plans to upgrade the theaters into high-tech, multi-purpose venues which would cover live broadcasts and all sorts of other electronic content?
I enjoyed the article. Expand your view, though, at your point about a global cinema marketplace. If you move to Netflix’s expansion into Latin America (Brazil’s rich market, for instance) or HBO’s several international expansions, you see how footprinting in overseas markets just like distributors TimeWarner, Viacom, and others already have done is a smart move for distribution expansion. The BBC partnered with TW in the US and some other territories as well, so the door goes both ways. Unlike here in the US (unless you count “the CW”), WB has branded channeling in every continent, not just “let’s show Vampire Diaries on your local station”. This allows for a true expansion and “broadcast” of WB-centric content. For Netflix, Amazon, and HBO, they have and will open professional quality distribution internationally for content providers that would otherwise seek distribution via TimeWarner. To say “noone has done it” is only a sign of the difficulties of past ventures and people everywhere are trying to do it now, just in the last 7-10 years thanks mostly to that big panacea, the Internet.
A mix of all theses reasons from real estate to soft power, I’ve seen Chinese businesses make a silk purse from a sow’s ear before though.
Excellent analysis + i think you must add an attractive theme to your blog.