Variety: What’s Next for Dalian Wanda?

News story originally published at Variety.com

By Brent Lang and Gene Maddaus

Wang Jianlin has led a triumphal march through Hollywood. Drawing on bottomless cash reserves, the Dalian Wanda Group chairman has snapped up theater chains and forged powerful friendships, while vowing someday to own a major studio. But last week, China’s richest man found himself in an unfamiliar position: being short of cash.

Wanda had agreed last fall to buy Dick Clark Productions—the company behind live TV events like the Golden Globe Awards and “Dick Clark’s New Year’s Rockin’ Eve”—for $1 billion. But under pressure from Chinese regulators and faced with steep losses at Legendary Entertainment, another Wanda property, Wang couldn’t close the deal.

Wanda declined comment for this story.

The stunning reversal is a major embarrassment for Wang and puts his conquest of Hollywood, once seemingly inevitable, in grave doubt. It also raises broader concerns about the future of Chinese investments in the U.S. entertainment business. Wang is known to be close to the Chinese Communist Party and was thought to be immune from political interference in overseas deal making. His inability to consummate a high-profile acquisition sends a chilling message to others.

In the aftermath of the busted deal, some have argued that the price for DCP was too high. (The company was sold to Guggenheim Securities in 2012 for $370 million and later spun off to Eldridge Industries, run by former Guggenheim partner Todd Boehly.)

Last week, rumors circulated in Hollywood and in Beijing that Wang only recently discovered that DCP does not own its awards shows outright but only has the right to produce them, a realization that caused him to have second thoughts.

But sources familiar with the deal’s implosion say that version of events is preposterous. While the acquisition was pending, Wang held a cocktail party for the members of the Hollywood Foreign Press Assn.—a sure indication that he knew of the HPFA’s ownership of the Globes. What’s more, the deal had been brokered by Moelis & Co. and Goldman Sachs—experienced firms that wouldn’t allow such a major misunderstanding to occur.

Instead, these sources say, Wanda was simply unable to come up with the money to fund the transaction. Foreign investment by Chinese firms soared to record heights in 2016, but in November the government began to tighten the reins. Wanda is China’s largest owner of commercial property, with hotels and shopping centers across the country. But under the new rules, the conglomerate could not move its domestic capital overseas. That could pose risks for its other overseas developments, including hotels, hospitals, cinemas, sports ownership, and a planned leisure complex outside Paris.

Wanda could have gotten around the restrictions by using offshore funds to close the DCP deal. But one of its major entertainment holdings, Legendary, has been hemorrhaging money. Wanda bought the company a year ago for $3.5 billion. Since then, Legendary has struggled with disappointing returns on “Warcraft” and a massive flop with “The Great Wall,” a fantasy adventure with Matt Damon that will lose at least $75 million. That’s left the company short of funds.

Wanda had planned to take Legendary public on the Chinese stock exchange, according to these knowledgeable sources. But Chinese regulators nixed the offering, leading to a cash crunch.

With Legendary in trouble, Wanda could not come up with additional offshore money for DCP. It did attempt to do so, however. On Jan. 17, Wanda sent Eldridge a notice to extend the closing date to Feb. 28, according to a lawsuit Eldridge filed in Delaware Chancery Court. Under the terms of the agreement, Wanda paid a $25 million fee to extend the date—a sign that the company was intent on consummating the deal.

However, by Feb. 28 Wanda still had insufficient funds. Eldridge delivered Wanda a notice terminating the agreement on March 6. Eldridge is now suing for an additional $25 million termination fee.

The troubles at Wanda aren’t the only signs of strain in Sino-Tinseltown relations. Paramount Pictures is grappling with delays in receiving $1 billion in funds from the slate-financing deal it struck in January with Shanghai Film Group and Huahua Media, a slowdown that could prevent the studio from greenlighting several projects.

Chinese investment in the U.S. surged to $54 billion in 2016, a threefold increase from 2015, according to the China Global Investment Tracker, a database maintained by the American Enterprise Institute. However, the pace of investment has dropped since November, when the Chinese government implemented restrictions on the flow of capital overseas.

The price tag of Wanda’s purchase of Legendary raised eyebrows when it was initially announced. There was a sense of sticker shock, considering that the reported price was in the range of what Disney paid for Marvel or what NBCUniversal shelled out for DreamWorks Animation, despite the fact that Legendary has a meager library of films and relies on intellectual property like Godzilla that it doesn’t own outright. However sources say the structure and size of the deal were different than reported. In China, companies syndicate the money they pay for properties, going out to financial markets to raise funds after signing memorandums of understanding. Fundraising wasn’t as robust as expected, putting the cash portion of the deal at $2 billion. One insider close to Legendary says the price tag includes the absorption of $1.5 billion in debt, making the total valuation approximately $3.5 billion.

Legendary founder Thomas Tull was forced out of the company earlier this year after Wanda’s leadership became frustrated by the underperformance of the film slate. Sources in the distribution community say they’ve noticed that the projects Legendary is making have improved following the 2016 hire of production chief Mary Parent. “Kong: Skull Island,” for instance, scored with critics and was hailed for its sense of spectacle and adventure. The film debuted to $142.6 million worldwide last weekend, a hefty result save for its $185 million production budget. It will need to do well overseas in order to wind up in the black.

There’s a lot riding on “Kong.” The studio has grand ambitions to create a franchise of monster movies that will culminate in a face-off between Godzilla and King Kong. Those plans may be abandoned if “Skull Island” fails to make a profit.

Wanda also faces a management problem with Legendary. The Chinese giant had been heavily courting Jim Gianopulos, the former head of Fox’s film studio, to run Legendary and build it into a major production, marketing, and distribution force to compete with the Hollywood majors. But Gianopulos appears to be poised to take a job running Paramount, which will mean that Legendary would be forced to find another leader with the global vision and depth of experience to revitalize its film and television slate. The studio has been looking at other candidates, according to an insider.

Throughout its history, the movie business has had an insatiable appetite for other people’s money. Having cycled through European investors, Texas oil barons, and hedge funds, Hollywood seemed to see China as its most promising new font of capital. Wanda’s decision to abandon its play for DCP and the shaky future of the Paramount slate financing may signal that it’s time for studios to find a new tree to shake.

“The game is going to get tougher to raise money,” says Hal Vogel, a media analyst. “Hollywood may not want to find another source of financing, but the market conditions may be such that they have no choice.”