Is this the golden age of film and television acquisitions in China?

By Liu Yumei, Lu Qian, t Concord & Partners
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Against the background of state policy support, China’s film and television industry has started to expand rapidly, with the leading cinema circuits preparing to list, and film and television production companies, famous actors, etc., throwing themselves into the development of cinema. However, the reality is the speed at which cinemas are increasing, due to overheated investment, far exceeds the speed at which the box office is expanding. The lead author is of the opinion that to satisfy the funding and platform needs for making quality films and television programmes, increased concentration will need to become the trend in the industry, and large companies with sophisticated management will become the industry integrators. The next five to 10 years will witness the golden age of film and television mergers and acquisitions (M&A) in China.

刘玉梅 Liu Yumei 共和律师事务所 合伙人 Partner Concord & Partners
刘玉梅
Liu Yumei
共和律师事务所
合伙人
Partner
Concord & Partners

The Hollywood model

The Hollywood wave of M&A began with the acquisition in 1985 of 20th Century Fox, one of the eight large Hollywood film studios, by press mogul Rupert Murdoch. Subsequently, M&A became an important phenomena in the Hollywood film and television industry. After the establishment of Lionsgate in 1997, it executed a series of five acquisitions, gradually expanding the size of its film and television copyright library and business sectors, becoming a world famous film and television company in a mere 16 years.

Additionally, the acquisition of Columbia by Sony in 1989, the acquisition of Universal and establishment of NBC Universal by GE in 2004, the acquisition for US$4.8 billion of the venerable Hollywood studio MGM in 2005 by a consortium lead by Sony, and the acquisition for US$1.6 billion of independent studio Dreamworks by Paramount are all typical cases of acquisitions in the US film and television industry.

卢茜 Lu Qian 共和律师事务所 律师助理 Paralegal Concord & Partners
卢茜
Lu Qian
共和律师事务所
律师助理
Paralegal
Concord & Partners

Integration of strengths

The scramble for extensive growth has slowed in China, mainly due to companies’ financial problems, and the leading companies in China’s film and television industry have gradually begun using acquisitions to expand horizontally – increasing the level of industrial concentration and realising an industry reshuffling – and vertically, to strengthen their marketing strategies and carry out upstream and downstream integration in an industry chain.

The method of investment in China’s traditional film and television industry has normally been investment in a single film or television drama, or targeted at a single company. However, this type of investment means a great deal of uncertainty, and investors usually need to invest in several films, or a relatively large film production company, to hedge their risks.

Investment in a state-owned enterprise (SOE) can bring state policy support, with such large SOEs as China Film Group, Shanghai Film Group, etc., now having a complete industry chain in embryonic form, giving them a strong capacity to combat risk. However, these large SOEs are not lacking in funds, and opportunities for investing in them are relatively few. On the other hand, private enterprises are more competitive in the market, and have reached a certain size and attracted a large pool of talented directors and actors, although their capacity to combat risk is relatively weak.

In the current market environment, acquiring and reorganising quality enterprises in close association with capital markets, and creating a complete industry-chain film and television platform of a certain size so as to endow it with the strengths of both SOEs and private enterprises, will become the investment method most effective in grasping China film and television market opportunities, and avoiding risk.

Acquisition climate

Since 2011, the curtain has been formally raised on the acquisition and reorganisation era in China’s film and television industry, and acquisitions under the new situation manifest to a greater extent horizontal business concentration and vertical industry-chain integration.

In 2011, through the purchase of a 55% equity stake in the digital entertainment publisher JY Entertainment for RMB140 million (US$23 million) and long-term co-operation with major video websites, Huace Film & TV nicely filled in gaps in its business. In May 2012, the Wanda Group paid US$2.6 billion to acquire the world’s second-largest cinema circuit group, AMC Entertainment Holdings, in one leap making Wanda the world’s largest cinema circuit operator.

In September 2012, Beijing Galloping Horse Media, together with India’s Reliance Mediaworks acquired Digital Domain, one of the four large Hollywood special effects companies, and its subsidiary Mothership for US$30.2 million. By virtue of this acquisition, Galloping Horse further improved its complete industry-chain layout, greatly boosting its influence in China and abroad.

In July 2013, Huace Film & TV acquired 100% of the equity in Croton for RMB1.65 billion, making it the largest disclosed acquisition project, in terms of transaction amount, in the domestic film and television industry to date. Once the acquisition is complete, Huace Film & TV is expected to become the first company in the domestic film and television drama industry to have a market share exceeding 10%. This will test the waters of a new industry model that marries a large digital platform with the traditional film and television industry – a professional and industrialised typecast of a film, television and culture industry under a “large culture, large digital” model, and the first Chinese-language film and television open platform.

From the perspective of policy support for culture industry acquisitions, the Third Plenum of the 18th Central Committee of the Communist Party of China reiterated strengthening of the country’s cultural soft power, establishing a modern cultural market system and making the culture industry an important part of the state’s strategic development.

However, even though acquisitions and alliances seem logical, the road to an acquisition is seldom smooth sailing. To some extent, the current subjects of culture industry acquisitions are private enterprises and foreign enterprises, whereas the cross-ownership system reorganisation activity level of the majority of SOEs is relatively low.

Companies that wish to carry out acquisitions and restructurings additionally face obstacles such as the approval of the China Securities Regulatory Commission (CSRC), insufficient support from current tax policies, etc. How to carry out intensive content, channel and terminal integration through industry acquisitions, and realise cross-regional, cross-media and cross-ownership system co-operation, and how authorities such as the CSRC are to carry out acquisition and restructuring reform, are all issues that desperately require resolution when acquisitions are carried out in the film and television industry.

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