China's Second-Richest Man Becomes Liability for Cinema Chain AMCBy
Majority shareholder Wanda is said to face crackdown in China
Scrutiny seen futher limiting deals across the Pacific
The crackdown on the empire of China’s second-richest man is being felt half a world away in the Kansas City suburbs, where movie-theater chain AMC Entertainment Holdings Inc. is trying to calm rattled investors.
Wang Jianlin’s Dalian Wanda Group is AMC’s controlling shareholder, and the Chinese tycoon has spent the last few years turning the company into a global powerhouse with acquisitions in the U.K. and Sweden. With Chinese authorities now scrutinizing Wang’s transactions and cutting off his funding, AMC is making the case that it’s not so dependent on Wanda, which owns a 58 percent stake.
“AMC is an American company run from its Leawood, Kansas, headquarters by our management teams located in the U.S. and Europe,” Chief Executive Officer Adam Aron said in a statement Tuesday. “We are grateful for Wanda’s support of AMC’s efforts over the past few years to grow our business, to increase our profitability, to sustain some 45,000 U.S. and European jobs for AMC employees, and to improve the movie going experience for our more than 350 million U.S. and European guests each year.”
Six of Wanda’s recent deals, such as the purchases of Sweden’s Nordic Cinema Group Holding AB and U.S. chain Carmike Cinemas Inc., were found to violate Chinese rules, Bloomberg reported this week. China will ban banks from providing Wanda with financial support linked to the investments and barring the company from selling those assets to any Chinese companies, Bloomberg reported, citing people familiar with the matter.
AMC said those acquisitions and others, including American company Starplex Cinemas and the U.K.’s Odeon & UCI Cinemas Holdings Ltd., were fully financed by its own resources and didn’t rely on Wanda or Chinese lenders for funding. Wanda doesn’t actively participate in the day-to-day running of AMC beyond the work of the three executives who sit on its board, alongside six American directors, the company said.
In 2016, Wanda paid $3.5 billion for Legendary Entertainment, a co-producer of movies like “Jurassic World,” to become the first Chinese company to own a Hollywood filmmaker. The Burbank, California-based producer said in a statement Tuesday it is “well capitalized with liquidity to fund its film and TV slates and operate its business as usual.”
Furthermore, “Legendary has not been presented with any Chinese bank documents referenced by the recent press reports surrounding its parent, Wanda, and has not experienced any change in its relationship with Wanda,” the company said.
AMC’s statement Tuesday helped stabilize its shares after a 10 percent decline on Monday. The stock was up 2 percent to $20.10 on Tuesday.
Still, the shares are down 43 percent from their most recent peak in November, hurt by a sluggish summer box office in the U.S. as well as a possible move by Hollywood studios to make their new movies available in homes sooner. Regal Entertainment Group, the No. 2 exhibitor, is down 22 percent, while Cinemark Holdings Inc. is down 11 percent.
Wang’s problems in China add to the company’s headaches. If banks respond to the government decree by squeezing credit lines and restricting debt rollovers, Wanda may have no choice but to sell off pieces of Wang’s empire. That could put pressure on AMC shares, though Wanda has much bigger assets to sell, said Eric Wold, an analyst at B. Riley & Co. “Investors are selling first and asking questions later,” Wold said.
Analysts at Credit Suisse cut their price target for AMC to $17 a share from $20. “This heightens the risk that AMC will not have a ‘backstop’ financing partner going forward,” the analysts said in a note.
In a March interview, Aron had said he still had a large appetite for deals, especially outside the U.S.
“I don’t think in my wildest dreams I thought we would go from being the second-largest market-share player in the U.S. to the largest in the U.S., the largest in Europe and in the world in 14 months,” Aron said at the time. “It is great for our company.”
The crackdown highlights the chilling of outbound Chinese investment into Hollywood, an about-face from last year’s record overseas dealmaking by Chinese companies. Not only have officials in China have been more closely scrutinizing “irrational” outbound acquisitions, but lawmakers in Washington have called for the government to slow the pace at which Chinese companies are snapping up American media targets -- calling out Wanda in particular.
Some transactions have already been affected by higher government scrutiny in both countries. Wanda’s $1 billion acquisition of TV company Dick Clark Productions Inc. was called off earlier this year, and a potential takeover of $4.6 billion movie maker MGM Holdings Inc. by Chinese buyers never materialized, according to people familiar with the matter. The frosty dealmaking climate poses a challenge for Hollywood studios, which have gotten used to support from Chinese investors to help finance movies.
“If you were holding an entertainment or consumer company hoping for a Chinese company to buy it out then this puts the kibosh on that,” said Wold, who advises buying AMC shares.
Wang used to talk of taking stakes in companies like Lions Gate Entertainment Corp. and MGM and also looked last year at acquiring a stake in Viacom Inc.’s Paramount Pictures. He has also said he wants to control 20 percent of the global movie market. With AMC, he already operates the most movie screens in the world. But future dealmaking will be tough “considering the political and economic climate on both sides of the Pacific,” said Marc Ganis, president of Jiaflix Enterprises, which helps market and distribute films in China.
“They can do things outside of China with non-Chinese money if they choose,” Ganis said of Wang’s company. “Wanda is still a formidable company but it appears these actions would impact the significant expansion plans they have discussed publicly.”