What China’s Latest Crackdown Means for Hollywood

Major cross-border acquisitions are a no-go and the fate of co-financing arrangements is unclear at best

China’s regulators announced a major crackdown on cross-border acquisitions Friday, saying that investments in entertainment, sports and hotels would be restricted and putting an official stamp on an informal policy that has caused the firehouse of Chinese money pouring into Hollywood over the last couple years to dry up.

Earlier Friday, the Chinese National Development and Reform Commission, in conjunction with its State Department, published documents outlining its plans to “restrict” dealings in “real estate, hotels, studios, entertainment, sports clubs and other overseas investment.”

It’s a significant blow to companies like Dalian Wanda Group, which had been one of China’s most aggressive acquirers in recent years — and one of Hollywood’s deepest-pocketed buyers. Wanda splashed a healthy $3.5 billion on “Jurassic World” production company Legendary Entertainment in early 2016, but its proposed $1 billion acquisition of dick clark Productions fell through earlier this year due to difficulties getting money out of China and gaining the approval of regulators at that eye-popping price tag, as TheWrap exclusively reported.

And while big-ticket purchases of Hollywood entities appear to be off the table for now — a Chinese-owned major or mini-major studio, which appeared almost imminent a year ago, now seems like a far-fetched possibility — co-financing arrangements with Chinese companies, so important to many studios, also may dry up.

John Burke, a partner at Akin Gump who focuses on film finance and leads the firm’s entertainment group, told TheWrap that he’s worked on numerous deals with Chinese partners over the last six months that have all failed to get government approval, and Friday’s announcement only validates the increasingly pessimistic climate surrounding Hollywood deals involving Chinese partners.

“What [China’s] been telling us for the last six months is that entertainment deals can get approved if they satisfy certain requirements,” he said. “Yet we haven’t seen any entertainment deals actually get approved. Maybe they weren’t saying what they really mean. And now we know that’s actually the way we were heading.”

And with the regulatory documents not distinguishing between long-term investments like Wanda taking an equity stake in Legendary and short-term individual or slate financing deals, Burke says that it looks like the entertainment restrictions will affect both.

“I think this is a total shutdown,” he said. “Until this actual announcement came out, people were still hopeful. Maybe not optimistic, but hopeful that some companies could still get investments approved. But now…”

That would be a notable change from just a few months ago. Schuyler Moore, a partner at Greenberg Glusker who’s worked on numerous deals involving Chinese film companies, told TheWrap earlier this summer that China’s de facto crackdown on entertainment industry acquisitions hadn’t yet affected purchases of individual films or content financing deals — as long as they could manage the currency restrictions.

“I don’t expect it to be a change as far as purchase of content for Chinese distributors,” Moore said.

However, a high-profile agent who spoke on the condition of anonymity because he’s working on active deals with Chinese financial partners told TheWrap that those arrangements been viewed with an increasingly large grain of salt.

“If you have a Chinese partner, sometimes you don’t have a partner at all,” he said.

Burke said Friday’s announcement, while hardly shocking, puts a capstone of sorts on what was once a deep well of Chinese capital ready to be poured into the Hollywood — at least for now.

“I think there’s just been a lot of pessimism in the market,” Burke said. “I think this codifies it.”