Chinese companies looking to escape slower economic growth at home have turned, quite naturally, to soccer and Hollywood. They should prepare for some unhappy endings.
Recon Group, the Chinese firm that bought the U.K.'s Aston Villa Football Club, is the latest to attempt to add movie making to its bow, in talks to acquire Millennium Films, according to people familiar with the matter. Recon will likely buy the production house behind action flicks such as "The Expendables" through Shenzhen-listed Recon Wenyuan Cable Co., the people said. Recon Wenyuan Cable said in a statement late Wednesday that one of its units plans to buy a 51 percent stake in a U.S. film maker for up to $100 million.
Tony Xia's Recon is one of a growing list of Chinese companies reshaping their fortunes by morphing into entertainment conglomerates. Wang Jianlin's Dalian Wanda Group Co. bought Legendary Pictures Inc., of Godzilla franchise fame, last year and also owns part of Spanish soccer club Atletico Madrid. Many are shedding their old identities almost entirely. Cultural Investment Holdings Co. used to make auto parts while Recon Wenyuan Cable designs and sells wires for electrical equipment.
Recon Wenyuan could do with a boost. Revenue growth has been slowing and debt increased fourfold in the four years through 2015. Its stock, however, is trading at elevated levels -- 91 times price earnings before it was halted from trade last month -- so raising funds for any acquisition should be relatively easy.
But being in Hollywood isn't a surefire ticket to success. Transactions by Chinese companies have faced backlash from U.S. politicians and Beijing is also clamping down on capital outflows and acquisitions that are outside a firm's core competencies. The investor group that struck a deal to buy the AC Milan soccer team from former Italian Prime Minister Silvio Berlusconi is still awaiting approval for its transfer of 740 million euros ($781 million) from China to finance the purchase.
Movie-ticket sales in China, meanwhile, are only starting to recover from their worst year since 2008. "The Great Wall", a $150 million fantasy epic starring Matt Damon in which Legendary was the largest investor, did well on the mainland but is poised for a weaker opening in North America this weekend.
To top it off, dealing with Hollywood types, or football managers for that matter, is never easy. Anhui Xinke New Materials Co. found out the hard way when it walked away from a deal to buy Midnight Investments, owner of Voltage Pictures. It cited the U.S. firm's failure to reply to requests for information as one of the reasons for the scrapped transaction.
Since Recon bought Aston Villa in May last year, the club has languished, even as the group has invested in its players. Xia may find any Hollywood forays equally unsatisfying.
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