China hopes its investments in Hollywood will help build its own entertainment industry
Han Sanping is a big fan of actor Will Smith. After entertaining Smith in Beijing two years ago, the chairman of China Film Group found a different way to keep up with Smith's filmmaking efforts. State-run China Film contributed $5 million to help finance a remake of The Karate Kid, produced by Smith and starring his son Jaden. Han's mogul turn was a hit. The film, distributed by Sony's (SNE) Columbia Pictures, grossed more than $356 million in worldwide ticket sales and was a huge hit in China.
For Hollywood, always a dream factory powered by other people's money, the People's Republic of China offers huge potential as both a funding source and a market. On Sept. 26, Orange Sky Golden Harvest Entertainment, a Hong Kong-based film company, paid $25 million for a 3.3 percent stake in Legendary Pictures, the maker of such hits as The Dark Knight and Inception. Meanwhile, China's new class of millionaire entrepreneurs is financing locally made films. Hollywood executives are even taking meetings with Chinese toy companies eager to take their creations to the big screen.
"It's a largely untapped market," says Clark Hallren, managing partner at Los Angeles-based financial advisory firm Clear Scope Partners. "There appears to be great promise there and a tremendous amount of capital. Similar to how those in search of capital once focused on the Middle East, the same dynamic seems to be occurring with China."
The dealmaking to date has been more a trickle than a waterfall. Chinese investors weighed bids for Miramax and debt-plagued Metro-Goldwyn-Mayer when those studios were put up for sale in the past year, but they didn't bite, says attorney Schuyler M. Moore, a partner at Stroock & Stroock & Lavan in Los Angeles. Their activity may pick up, however, as Chinese officials become more comfortable with the ways of Hollywood.
"Chinese investors are very sophisticated and have been contemplating the kinds of investments they want to make," says Charles "Skip" Paul, a longtime Hollywood executive and a senior adviser to investment bank Centerview Partners. Paul negotiated the 1986 agreement with the Chinese government that opened the country to limited imports of foreign-made films. He also advised Orange Sky in its Legendary deal and travels to China every six weeks to meet with potential investors.
The Chinese government hopes to use its investments to gain the technical and creative knowhow the country needs to aggressively build its film industry. In the next three to four years the number of screens in China will increase to about 13,000 from 8,000 today, according to John P. Wilmers, chief executive officer of Ballantyne Strong (BTW), which makes digital movie equipment. The U.S. has about 39,000 screens. China is the largest non-U.S. market for Imax's (IMAX) big-screen theaters, with 37 built and an additional 59 scheduled to be added by 2013. In 10 years, says Imax CEO Richard L. Gelfond, China may be the largest exhibition market in the world.
"They want to be market leaders in producing films," says Doug Belgrad, president of Columbia Pictures, which made The Karate Kid mostly in Beijing. The Chinese are using their financial relationships to get teaching moments whenever they can. The Columbia crew, for instance, showed the local Chinese production team how to more quickly upload film from daily shoots to be viewed online, says Belgrad.
That level of involvement sets Chinese investors apart from others who have come to Hollywood offering cash, says Clear Scope's Hallren. "I don't think this will be the next case of intelligent people investing money in unintelligent ways," Hallren says.
What China possesses already is plenty of capital for the right project. Sheng Boyu, a 30-year-old real estate developer, put up $50 million to help finance Double Lives, a film about a modern-day treasure hunt starring Pierce Brosnan being filmed in China. "There is money if you know how to navigate the landscape," says Dan Mintz, CEO of Beijing-based Dynamic Marketing Group, which distributes and markets American- and Chinese-made films in China. Mintz says he raised $100 million in China, "and we could go higher" to invest in films made or distributed there.
The obstacle for outsiders, he says, is that the government favors Chinese-made movies and continues to impose a limit of 20 foreign films a year that can be shown in the country. With investors who are Chinese, some films can reach the market without counting as part of the 20-slot quota. And there may be other benefits: When Mintz released The Founding of a Republic, a film his company financed with China Film Group, he said the government ordered rival films out of many mainland theaters.
China's potential has sent dealmakers descending on Beijing. Goldman Sachs (GS) is advising the Chinese Investment Corp. sovereign fund on film investments, according to two knowledgeable Hollywood financiers. Deutsche Bank (DB) has stepped up its efforts in China to focus more on entertainment deals as well, says Brian C. Mulligan, vice-chairman of Deutsche Bank Securities' media and telecommunications practice in Los Angeles, which advised Legendary in the Orange Sky deal.
Still, investing in Hollywood hasn't always turned out well for those writing the checks. "Some will benefit from smart and knowledgeable advisers," says Amir Malin, founder of New York-based private equity firm Qualia Capital and former CEO of film studio Artisan Entertainment. "Others will be taken on an endless merry-go-round of Hollywood premieres and empty financial returns."
The bottom line: Hollywood is looking to China for money to help produce films. The Chinese want those relationships to bolster their own movie industry.
With Eva Woo