Alibaba Plays With Paramount, Investment Coming?

| About: Alibaba Group (BABA)

Summary

Alibaba's new co-production deal with Paramount suggests the pair could soon form an equity alliance.

This follows Paramount's February announcement that it may sell a stake of itself to a strategic partner.

Alibaba's movie arm, Alibaba Pictures, will help co-produce the next installments in Paramount's popular "Teenage Mutant Ninja Turtles" and "Star Trek" series.

The hyperactive Alibaba (NYSE:BABA) is in yet another major headline today, forming a tie-up to co-produce two of the most successful movie franchises from Hollywood giant Paramount. But what's most intriguing about this latest deal is the timing, since it comes just over a month after Paramount announced it may be preparing to sell a stake of itself to a Chinese buyer.

Paramount announced that intent in late February as part of a broader move by Hollywood to cash in on China's booming box office that is the world's second largest, behind only the US (previous post). Paramount and the other Hollywood studios also like the fact that Chinese buyers are often willing to pay big premiums for big-name brands, which should theoretically help to boost the stock prices of those foreign companies.

We'll return to bigger picture issues shortly, but first let's review the headlines that say Alibaba's movie arm, Alibaba Pictures, will help co-produce the next installments in Paramount's popular "Teenage Mutant Ninja Turtles" and "Star Trek" series (English article, Chinese article). Both movies will be released later this year and will be imported to China, the reports say.

There's no word on the size of the investment, but both films look like they have budgets in the $100-$150 million range. That would mean Alibaba's investment is probably in the $25-$50 million range, which is relatively modest for the company. This is actually the second time that Alibaba has invested in a Paramount film, following its investment last year in the latest movie from the studio's "Mission Impossible" series.

Paramount also is no stranger to co-investing with Chinese partners, which not only provides funding but also helps its movies get access to the China market. The state-owned China Movie Channel and its online movie services partner Jiaflix helped to finance Paramount's 2011 film "Transformers: Dark of the Moon," which was a huge success in China (previous post).

Now that we've looked at the latest tie-up news, let's re-examine Alibaba's previous record in Hollywood and the February reports saying Paramount was looking for a Chinese investor. Those earlier reports said that Paramount's parent Viacom (NASDAQ:VIAB) was exploring a stake sale after being approached by several investors, and that it hoped to reach a final agreement in the next 3-4 months.

China Sees Gold in Hollywood

The reports cited one analyst saying Paramount was currently valued at around $10 billion, meaning a strategic stake of 5-10 percent would cost the buyer around $1 billion. Alibaba certainly has that kind of money, though so do a number of other Chinese companies. In particular, Internet search giant Baidu (NASDAQ:BIDU), private equity firm Fosun and movie theater operator Wanda have all been chasing similar investments in the last two years.

That said, Alibaba chief Jack Ma has shown particularly strong interests in Hollywood, as evidenced by his purchase two years ago of Alibaba Pictures, known as ChinaVision Media at that time. Ma was reportedly paying calls on many of the major Hollywood studios back in October 2014, shortly after his company raised $25 billion in the world's biggest IPO of all time (previous post). That visit was never followed by an announcement of any major deal, though I suspect Ma has probably returned to Hollywood on at least one or two follow-up trips since then.

Meantime, Wanda recently purchased Hollywood studio Legendary Entertainment for $3.5 billion, meaning its plate is probably too full to pursue a Paramount deal right now. That could leave Alibaba as a leading candidate to buy the Paramount stake in the months ahead, and this latest co-production tie-up certainly seems to indicate the pair is getting increasingly cozy.

Disclosure: None.