Huahua Media’s decision to scrap a $1 billion investment in Paramount Pictures movies reflects a dramatic slowdown in foreign investment in Hollywood.
In January, Paramount Pictures looked like it had scored a coup. Bejing-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.
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 second largest film market has been a key source of box office revenues, and it’s played an important role in helping studios to offset the rising costs of making movies. In recent years, foreign investors from China and other countries have financed as much as 35% 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.
The last year has seen a dramatic falloff in Chinese money pouring into America’s film and TV industry. In 2016, Chinese investment in the U. S. entertainment industry hit $4.78 billion.This year, investments have shrunk to $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.”
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, has signed co-financing deals with David Ellison’s Skydance Media based in Santa Monica and with toymaker Hasbro, which is 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 U. S. 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 on movies and TV shows for their own streaming services. While that’s a boon for filmmakers who want to get their projects funded, it’s another threat to legacy studios.
“There’s a lot of money going to the movie business through these tech companies, but it’s not going to the studios. It’s going directly into the creation of content,” said one entertainment executive.
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 company is buying global rights to movies, leaving fewer opportunities for foreign distributors that finance movies by purchasing distribution rights. Apple has touted 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.”
These 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.”
* Figure through Sept. 30
Source: Rhodium Group
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.”
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 colorful 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 U. S. federal corruption probe 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 reached a settlement with the U. S. government in September. Aziz has said he had no knowledge of receiving ill-gotten funds.
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 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.
