Bottom line: Foundering prospects of cross-border tie-ups involving DreamWorks and Paramount shows the love affair between Hollywood and China may be entering a new phase of lowered, more realistic expectations.
The old saying says that what goes up must come down, and that certainly appears to be the case with new reports of the unraveling of two more China-Hollywood tie-ups. The latest reports say that US giant DreamWorks Animation (NASDAQ:DWA) is looking to sell out its stake in Oriental DreamWorks, its landmark China animation joint venture that was launched with fanfare 5 years ago. At the same time, another report is saying a $1 billion film production tie-up between two Chinese partners and Paramount is reportedly running into trouble due to turmoil at the Hollywood studio.
The unraveling of these two major deals comes just weeks after another deal involving Wanda Group's planned purchase of Dick Clark Productions also appears to be coming unglued. In that case, the culprit is China's recent currency controls, which were preventing Wanda from getting the necessary funds outside the country to complete the $1 billion purchase. But Wanda was apparently also worried it was overpaying for the asset.
There doesn't really appear to be an overriding theme in these three stories, since each has background that is very different. But it does seem somewhat significant that all are unraveling within weeks of each other. That perhaps may reflect a dose of reality setting in on both sides of the Pacific, following a hyperactive love affair over the last 5 years that saw billions of dollars in tie-ups between star-struck parties in both the US and China.
Let's begin this reality-check story with DreamWorks Animation, which is reportedly looking to sell its 45 percent stake in Oriental DreamWorks. (English article) That particular joint venture was formed in 2012 when DreamWorks Animation was still run by Jeffrey Katzenberg, who was a huge China fan. Since then, the company has been purchased by a more pragmatic Comcast (NASDAQ:CMCSA), which it appears hasn't drunk as much of the China Kool-aide as Katzenberg.
The report on the deal is coming from trade publication Variety, and says Comcast is in talks with Oriental DreamWorks' two joint venture partners, China Media Capital and Shanghai Alliance Investment Ltd., about reorganizing the venture. At least one of the plans, and possibly the main one, under consideration would see the DreamWorks Animation sell out its 45 percent stake in the venture.
The report adds the venture hasn't performed very well, with its first production, "Kung Fu Panda 3" failing to meeting expectations. It notes that the venture only has one other film slated for release, the Himalayan picture "Everest," and that's not even set until 2019. It points out that Oriental DreamWorks laid off 40 animators in its Shanghai office last week.
Paramount Power Struggle
Next there's Paramount, which is reportedly struggling to keep its landmark $1 billion co-production deal with two Chinese partners on track, according to a report in the Wall Street Journal. (English article) Paramount signed the deal in January with Shanghai Film Group Corp and Huahua Media, who agreed to pay at least 25 percent of the costs for all movies produced by the studio over the next 3 years.
In this case, the report says it's the Chinese partners who are getting cold feet, following an ongoing power struggle at the top of Paramount. I won't go into the specifics of that struggle, but the turmoil also tanked another potential deal last year that would have seen the studio sell a stake of itself to an outside investor, most likely from China. The scrapping of that plan ultimately led to the later deal with Shanghai Film Group and Huahua, which simply got ownership of individual films rather than a stake in the studio.
I suspect that Shanghai Film Group and Huahua were probably a bit hesitant on the deal to begin with, and pursued it in the bigger rush among Chinese firms to jump on the Hollywood bandwagon. The power struggle at Paramount was certainly well known at that time, so for them to suddenly start worrying about that factor seems a bit insincere. At the same time, the pair could also be getting concerned over the growing difficulties of moving money outside China, which is also reportedly killing the Wanda-Dick Clark deal.
It's probably a bit too early to say the near simultaneous buckling of these 3 deals shows the China-Hollywood love affair is collapsing. But these 3 twists all coming at the same time does perhaps reflect a new stage of realism settling into the China-Hollywood love affair. That realism is partly being fueled by a sudden slowing at the China box office, combined with growing currency controls, and I expect we could see the flow of new cross-border deals slow sharply in the year ahead.