Imax Finds Potent Local Partners, Eyes China IPO

Apr. 9.14 | About: IMAX Corporation (IMAX)

Big-screen theater technology company Imax (NYSE:IMAX) is in the headlines today for a savvy move that will make it look more Chinese as it attempts to grab a major slice of the nation’s booming film market. The newly announced deal has Canada-based Imax selling 20 percent of its China unit to 2 local partners, including one with strong ties in China’s commercial capital of Shanghai. Equally interesting, Imax is saying it aims to list its China unit on one of China’s stock exchanges in the next 5 years, in what would become a rare instance of a domestic IPO by a majority foreign-owned company.

Imax’s plan represents a huge bet on China, and isn’t all that unusual for many foreign companies that are eying big growth in the market. An increasing number of firms are relocating their Asia headquarters to Shanghai and Beijing, and some are even going so far as to cut out China from the rest of their Asia operations to become its own separately-run region.

In the case of Imax, it’s not difficult to see why the company is placing such a big bet on China. The nation has risen rapidly over the last decade to become the world’s second largest box office behind only the US, generating $3.6 billion in ticket revenue last year. That boom has come on the back of a rapid build-up in the country’s movie theaters, and Imax has formed a close partnership with one of the largest operators, Wanda Group, to tap that market. Imax is also placing bets on the market for high quality television entertainment centers, forming another recent joint venture with leading TV maker TCL (HKEx: 1070; Shenzhen: 000100).

Against that backdrop, let’s look at the latest headlines that say Imax will sell a stake of its China operations to 2 media-focused investment funds, China Media Capital and FountainVest Partners. (English article; Chinese article) Each of the Chinese partners will pay $40 million for 10 percent of the company, with the investment expected to close next year. The deal will help to pave the way for an IPO by Imax China Holdings in the next 5 years, according to Chief Executive Richard Gelfond.

This deal looks quite shrewd all around, as it links up Imax with some very strong partners and also demonstrates its commitment to the China market. The IPO plan also looks smart, as it could give domestic investors a chance to buy shares in a promising technology company in the entertainment space. China’s publicly traded entertainment companies are now most limited to big state-run media firms, many of which are facing financial difficulties due to recent rapid changes in the industry.

This particular deal also marks a major advance for China Media Corp. (CMC), a media investor and joint venture of Shanghai Media Group (SMG), the largest media company in Shanghai. Since its inception in 2009, China Media Corp. has formed a number of other major tie-ups with global media companies.

One of its first big deals saw it take control of News Corps’ (NASDAQ:NWSA) Chinese TV channels, in what many saw as a major retreat by News Corp from the market. More recently, CMC partnered with US giant DreamWorks Animation (NASDAQ:DWA) to set up Oriental DreamWorks, which will be based in Shanghai and whose first major project will be the next film in the popular “Kung Fu Panda” series.

The deal also puts an initial valuation on Imax’s China business, pegging the unit’s worth at about $400 million, or about a fifth of the parent company’s market value. That looks about right in terms of revenue, since China accounted for $56.5 million of Imax’s $288 million in sales last year, or also roughly 20 percent. But China is growing much more quickly for Imax than its other markets, and I would expect to see the China unit’s value rise quickly and be worth up to 4 times its current level by the time it makes its IPO in 5 years.

Bottom line: Imax’s sale of a stake in its China unit to 2 local partners should boost its position in the market, adding sales momentum and sharply boosting its market value in the run-up to a domestic IPO.