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In January, Paramount Pictures looked like it had scored a coup. Beijing-based Huahua Media had agreed to invest $1 billion in the studio’s movies, another sign that China would be Hollywood’s main foreign benefactor for the foreseeable future.
Paramount this month said the co-financing arrangement, which would have covered 25 per cent of its film slate, had been scrapped because of the Chinese government’s clampdown on foreign investment in entertainment and other industries.
The action was not only a blow to Paramount, but also emblematic of a broader pullback of foreign money from Hollywood, by China in particular. The world’s secondlargest film market has been a key source of box office revenue, and it’s played an important role in helping studios offset the rising costs of making movies. In recent years, foreign investors from China and other countries have financed as much as 35 per cent of film budgets, according to industry financing sources.
Other casualties of China’s tightening restrictions on foreign investment include Chinese conglomerate Recon Holding, which scrapped its bid to acquire a majority stake in Millennium Films for $100 million; and Dalian Wanda Group, which canceled its $1 billion acquisition of Dick Clark Productions. Wanda also abandoned plans to integrate Burbank-based Legendary Entertainment into its publicly traded film company.
In the past year, there has been a significant reduction of Chinese money invested in US films and television. In 2016, Chinese investment in the US entertainment industry hit $4.78 billion. This year, investments have been $489 million as of Sept. 30, according to the research firm Rhodium Group. Beijing has tightened control on money leaving the country, fearing that the outflow of capital could weaken its economy.
“For now, everybody’s laying low,” said Los Angeles movie producer Scott Einbinder, whose company Cristal Pictures is backed by Hong Kong’s East Light Media. “There’s still definitely business being done, but it’s been constrained quite a bit.”
China’s retreat fits a recurring pattern of foreign investors who come to Hollywood with big ambitions, only to stumble. French conglomerate Vivendi in 2000 took control of Universal Studios through its acquisition of Seagram, but sold most of its entertainment assets to General Electric in 2004 after amassing huge debts. India’s Reliance Entertainment backed a relaunch of Dreamworks in 2008, an investment that proved costly. And Japan’s Sony Corp. has long struggled to get its film and TV division to work hand-in-hand with its electronics business.
With China taking a step back, there’s no clear foreign player stepping in to fill the gap. The industry has turned to other sources closer to home for money. Paramount, for example, signed co-financing deals with David Ellison’s Skydance Media, based in Santa Monica, Calif., and with toymaker Hasbro, based in Pawtucket, R.I.
“From where we’re sitting, foreign financing seems to be fairly quiet,” said Guillaume de Chalendar, global head of media and entertainment for Bank Leumi, the US division of Israel’s Leumi Group. “There are a lot of stories of Chinese investment getting canceled, and there’s not an obvious source of capital to replace that.”
Not that there is a shortage of capital for the film and TV business. Technology companies, including Netflix, Amazon and Apple, are spending billions of dollars on movies and TV shows for their streaming services. While that’s a boon for filmmakers who want to get their projects funded, it’s another threat to legacy studios.
Netflix, for example, is expected to spend $8 billion on content next year, including licensed material and originals, up from $6 billion in 2017. The Los Gatos, Calif., company is buying global rights to movies, leaving fewer opportunities for foreign distributors that finance movies by purchasing distribution rights. Apple has plans to invest $1 billion in original TV shows and films over the next year.
“The digital footprint is worldwide,” said Schuyler Moore, a partner at Greenberg Glusker who specializes in cross-border entertainment deals. “They are replacing foreign capital by squeezing the foreign distributors.”
Plenty of foreign money still flows through Hollywood. Sovereign wealth funds have long been interested in film investments, particularly studio film libraries that generate reliable revenues. For example, Qatar Investment Authority bought Miramax in 2010 with Colony Capital, and later sold the former independent-film powerhouse to Qatari broadcaster BEIN Media. Wealth funds, including Singapore’s state-backed Temasek and GIC, recently invested in talent agencies CAA and WME-IMG, respectively.
Those funds are selective and cautious in their investments. “It’s an industry where you have to know what you’re doing to make money in it,” said Michael Maduell, president of the Sovereign Wealth Fund Institute, a research firm. “They (sovereign wealth funds) are getting an inside look at what’s working and not working.”
Billionaires from other industries remain a major source of capital.
“High-net-worth individuals tend to play a bigger role now,” de Chalendar said. “We’re seeing films made because a particular high-net-worth individual wants a particular project to be made.”
Those wealthy individuals, however, have had mixed results. Fedex founder Fred Smith backs Alcon Entertainment, which produced hits including “The Blind Side” for Warner Bros., but most recently made a huge bet on the pricey disappointment “Blade Runner 2049.”
Gulf States Toyota owner Dan Friedkin in 2014 launched production company Imperative Entertainment, which has become embroiled in the sexual abuse scandal surrounding actor Kevin Spacey, the former star of its movie “All the Money in the World.”
Hollywood has a long track record of attracting colourful and controversial investors.
Red Granite Pictures, co-founded by Riza Aziz, the step-son of Malaysian Prime Minister Najib Razak, was swept up in a US federal corruption investigation for more than a year. Prosecutors seized rights to films including “The Wolf of Wall Street,” alleging they were financed with money embezzled by Malaysian government officials. Red Granite settled with the US government in September. Aziz has said he had no knowledge of receiving ill-gotten money.
Alwaleed bin Talal, who helped bail out Walt Disney Co.’s Euro Disney theme park in the 1990s and invested in 21st Century Fox, was arrested Nov. 4 in an apparent power consolidation by Crown Prince Mohammed bin Salman. He has sold his holdings in Fox, according Bloomberg data.
As for China, many experts predict that investors will return once the government eases restrictions on banks that fund the overseas transactions.
“While Chinese money is indeed restricted and has been for the last year, it doesn’t mean the spigot has stopped,” said John Burke, an attorney at Akin Gump who handles film financing deals. “Studios have to worry about who their next partners are going to be, but it’s not like, ‘Oh my God, where do I finance my next film?’ They have capital. The question is, what’s going to be the next wave? We haven’t seen it yet.”