Lights, Camera,Purchase!

Lights, Camera,Purchase!

Chinese cinema chain set to buy American-based AMC By Zhou Xiaoyan

D alian Wanda Group Corp. Ltd., a private Chinese firm based in Dalian,northeast China’s Liaoning Province,announced in May that it w ill purchase U.S.movie theater chain AMC Entertainment Holdings Inc., the second largest chain in North America. The deal is worth $2.6 billion, the largest acquisition for a movie theater franchise. Under the terms of the deal,Wanda must also assume AMC’s debt. The group also promised to invest up to $500 m illion in AMC to pay for its strategic and operating initiatives in the future after the acquisition.

The deal, the largest overseas cultural investment from a domestic private enterprise, needs approval from the Chinese and U.S. governments before being formally closed. Wanda promised to secure employment of AMC’s management team after the acquisition.

W anda Group, China’s leading commercial real estate developer, operates a variety of businesses including commercial properties, luxury hotels, tourism investment and department stores. Wanda Cinema Line,Asia’s largest movie theater chain, owns 86 cineplexes and 730 screens, of which 47 are IMAX screens, and plans to increase its chain to more than 200 cineplexes w ith 2,000 screens by 2015.

Wanda Cinema Line generated 1.79 billion yuan ($282.64 m illion) in box office revenue in 2011, ranking first domestically,according to the State Adm inistration of Radio, Film and Television.

Wanda w ill pay up to $3.1 billion for its AMC acquisition. Despite Wanda’s blueprint in the international market, worries from experts and industry insiders abound whether Wanda can turn the heavily indebted AMC into a profit maker, and whether Wanda’s practices in China can still apply in the foreign land.

A rea l d ea l

The purchase would turn Wanda into a truly global cinema owner, according to W ang Jianlin, Chairman of Dalian Wanda Group,who was ranked as China’s sixth richest person last year, having a personal fortune of $7.1 billion, according to the independently runHurun Report.

A lthough Wanda earned its initial fortune developing real estate, Wang’s ambitions reach far beyond the property sector.

“We are determ ined to become a firstclass multinational company w ithin 10 years.The proportion of commercial real estate should be lowered to less than 50 percent in Wanda by 2020,” said Wang.

Purchasing AMC is Wanda’s first step in our internationalization strategy. Wanda is also looking for other major cinema chains to acquire. It w ill continue to seek opportunities for overseas investments and mergers and acquisitions, especially in the cultural industry,in an effort to reach the goal of taking up 20 percent of the global film market by 2020,said Wang.

Wanda’s decision to pursue the acquisition is aimed at transforming its development pattern by expanding its cultural industry worldw ide.

Over the past three years, Wanda Group has invested in the cultural industry and tourism resorts. Wanda’s investment in the cultural industry has reached over 10 billion yuan ($1.58 billion), becom ing a key investment area for the group.

The total revenue from the cultural industry in Wanda is expected to reach 20 billion yuan ($3.16 billion) in 2012. And in the next five years, the number w ill double to 40 billion yuan ($6.32 billion), making the company the top 50 in the global cultural industry.

In China, its net profi t rate for cinemas is 17 percent, even higher than the real estate sector.

Wanda’s status as the biggest cinema chain operator after the deal w ill have more power to negotiate w ith movie producers in Hollywood and help the promotion of Chinese movies in the North American market.

Currently, “a major obstacle of Chinese movies entering the international market is the lack of local cinema chain channels w illing to PROSPEROUS CINEMA OPERATOR: Movie-goers buy tickets at a crow ded Wanda Cinema in Wuhan,central China’s Hubei Province show foreign fi lms,” said Yu Dong, CEO of Bona Film Group.

A fter Wanda’s AMC deal, this is bound to change. The Chinese w ill have a larger say in U.S. movie industry, said theLos Angeles Times.

A lthough Wanda’s deal excludes film distribution activities, Wang still prom ised to help good-quality Chinese movies reach international audiences.

“If great Chinese movies are produced,Wanda will help their promotion and distribution in the international movie market,” said Wang.

Wanda’s AMC acquisition is conducive to the overseas distribution of Chinese movies. From this aspect, Wanda is making a strategic investment and is making preparations for its initial public offering (IPO), said Gao Shouzhi, President of EntGroup, a leading research center of Chinese entertainment industry.

W o rth the p rice?

“The transaction for the acquisition is about the total box office for the past two years in China,” said Gao Jun, Deputy General Manager of Beijing New Film Association.“I don’t know where the money comes from.A fter that, how should Wanda realize a return on its investment?”

AMC is facing critical losses. Its total loss in 2011 stood at $82.7 million. “AMC has shrinking attendance and its profit has been squeezed by the private equity that owns AMC,”according to an article in theWall Street Journal.

Theaters in America are experiencing record low attendance as more people choose to watch movies on portable digital devices instead of at theaters.

In 2011, North American movie theaters sold 1.28 billion tickets, a 4.4-percent year-onyear decline and a 16-year low. The total box office in North America was $10.2 billion,a 4-percent decline year on year. Due to the sluggish cinema chain industry, AMC failed tw ice in its IPO during the past four years.

“Operating a cinema chain in China is a highly profi table business, while the situation is totally different in the United States, where the cinema chain industry in the United States is a sunset industry and a declining industry,”said Xue Jianxiong, Director of Research at the China Real Estate Information Corp. “The profi t margin of the cinema chain industry in the United States is extremely low,” he said.

Besides the market environment difference between China and North America,another worry is what Wanda generally does in China may not apply in foreign lands.

In China, W anda usually opens the Wanda Cinema Line inside its own commercial property—Wanda Plaza. Therefore, it can have a lower operation cost than other domestic cinema chain operators, resulting in a higher profi t rate. After acquiring the AMC, if Wanda can’t do enough in cost control, it can hardly solve the profi tability issue of AMC in the sluggish North American market. “I don’t think Wanda has enough understanding of the cinema chain industry in the United States.Neither has it conducted enough evaluation of the risks of the acquisition,” said Xue.