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The Gulf Today - Business - - SPECIAL REPORT -

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.”

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