The Recorder: Hollywood Deal Lawyers Wrestle With Great Squall of China

News story originally published at TheRecorder.com

By Todd Cunningham

Uncertainty and the drumbeat of a possible trade war are ominous clouds currently hanging over relations with Chinese investors, several of Hollywood’s top deal-making attorneys say.

Companies from the People’s Republic have poured more than $10 billion into U.S. film, TV and media interests in an unprecedented deal-making frenzy over the past three years. But that activity has ground to a virtual halt this spring as Beijing reined in overseas investment, President Donald Trump continues to rail against the U.S. trade imbalance with China and new deals are facing increased scrutiny from the feds.

“There’s just so much that we don’t know right now,” said Stephen Scharf, co-head of the sports, entertainment and media practice at O’Melveny & Myers, who advised IMAX on the creation of the giant screen titan’s IMAX China Film Fund, which will make 10 “tentpole” movies in Mandarin.

“I don’t think there is much doubt about the huge potential that China represents, and that in the long run the situation will smooth out,” Scharf said. “But President Trump has made a priority of the nation’s overall trade imbalance with China, of which Hollywood’s deals are only small portion. What if there’s a trade war, or we start one? Or the situation in North Korea blows up?”

Some of what they do know is cause for concern. Determined to bolster its sputtering economy, the Beijing government has advised—in China, that’s ordered—companies with state ties to do their investing at home, and set rules making it more difficult to get funds out of the country. Since the shift earlier this year, the pace of deal-making involving China and Hollywood has slowed, and no major deals have been announced.

Dalian Wanda, China’s most prominent media conglomerate and its most aggressive Hollywood investor to date, saw its $1 billion deal to buy Dick Clark Productions, a TV production company, fall apart soon after. Before the month ended, the company headed by China’s richest man, Wang Jianlin, saw its bid to buy a 49 percent stake in Paramount Pictures rejected amid a power struggle for control of the Viacom-owned studio between Sumner Redstone and his daughter Shari Redstone.

The recent underperformance of two high-profile and pricey film collaborations between China and the U.S. may also have diminished investors’ zeal.

“Warcraft,” the $160 million video game-based epic from Legendary Pictures, the Burbank studio acquired by Wanda in 2016 for $3.5 billion, did well in China but tanked in the United States. Then “The Great Wall,” a $150 million co-production of Universal and Wanda’s Legendary starring Matt Damon and filmed in China, came up short in the People’s Republic and the United States.

Protectionist Policies

The Chinese are not driving all of the concerns.

Wanda’s $7 billion shopping spree—it also acquired AMC Theaters in 2012 for $2.5 billion and Carmike Cinemas for $1.1 billion last year—had some legislators warning that the Chinese were buying out Hollywood last fall. They pressured lawmakers and urged the inter-agency Committee on Foreign Investment in the United States (CFIUS) to take a harder look at China’s Hollywood intentions.

The agency has done just that, according to attorney Christian Davis of Akin Gump Strauss Hauer & Feld.

The agency reports its statistics a year or more after the fact, but the CFIUS specialist said that he believes a record number of reviews were conducted in 2016 and the agency’s pace has continued or increased this year. Submitting to the reviews is voluntary, unless the agency intervenes after identifying potential national security concerns with a transaction. The review process can take two months if not significantly longer depending on the complexity of the case.

Entertainment and media companies in years past haven’t felt the need to submit to the reviews, which typically have been reserved for deals involving products or companies that pose a more apparent threat to national security. If the agency feels the deal does that, it can refer the matter to the White House and the president can make a final determination and potentially block the deal, leaving the parties without recourse.

Since Trump has taken office that threat has induced most attorneys to play it safe and recommend that their clients undergo the review, according to Akin Gump’s John Burke. The veteran dealmaker last year helped “Spider-Man” director Sam Raimi and his partner Florian Henckel von Donnersmarck launch their indie shingle Allegory Films with partial financing from a Chinese firm.

“What’s happened in the legal community is that attorneys are talking to CFIUS experts and realizing that even with situations that don’t on the surface seem to require it. It’s the safe play and you almost have to do it,” Burke said.

Burke is heading to France for the Cannes International Film Festival, which opens Wednesday, though he’ll be focused on the accompanying market for film sales. Will the Chinese restrictions hinder deal-making?

“I’m expecting to see fewer Chinese buyers,” he said, “and there may be more pressure on them to demonstrate that they have the liquidity to satisfy purchase orders.”

The Long View

Hollywood is famous for fleeting infatuations with financiers, foreign and otherwise, that don’t end well. Over the past two decades, deep-pocketed Germans, Japanese, hedge funds firms and Indian investors have come in flush and left shirtless.

“Well, it’s been about three years, that’s about the right schedule for the Chinese to lose it, isn’t it?” kidded Schuyler Moore, a foreign financing expert and partner at Stroock & Stroock and Lavan. He was integral to the $375 million TV and film financing deal Lionsgate Entertainment struck with China’s Hunan TV in 2015.

Moore is well aware of the potential market that China and its nearly 1.4 billion citizens represent for U.S. media, internet and film companies, as are all of the attorneys surveyed.

“China is significantly different than those other groups that came in and faded away,” said Manatt, Phelps & Phillips partner Lindsay Conner, who brokered the $1 billion 2015 slate financing deal between Robert Simonds’ STX Entertainment and China’s Huayi Brothers Media Corp.

“There are compelling business reasons that the Chinese and Hollywood will continue to do business, and in fact do even more business in the future,” he said. “China is the fastest-growing entertainment market in the world, and the U.S. needs that market as much the funding.”

Conner downplays the short- and long-term impact of the restrictions and remains profoundly bullish on China.

“Deals are still being made, and smart money can still get out of China,” he said. But he acknowledged that Hollywood isn’t operating in a vacuum.

“We are no more exempt from global disruption and downward pressure from that than any other industry,” Conner said. “But barring that, I expect to see as many or more deals with China this year, and more in three years and even more in five years.”