China Film Group's plan to go public could improve Hollywood's tortured relationship with the republic's biggest distributor, potentially pushing CFG to be more bottom-line oriented and less punitive, analysts tell TheWrap.
With the short-term dispute over box-office payments reportedly resolved, China Film Group's desire for a quick IPO can move forward. In fact, its wish to go public may have been the reason Hollywood prevailed — China Film Group would've had difficulty attracting foreign investors with that much debt on its books and was under pressure to make a deal, as TheWrap first reported last week.
Also read: China Box-Office Standoff Over! Hollywood Prevails in Tax Fight (Report)
The dispute hinged on a 2 percent luxury tax the republic imposed on box-office receipts, which was not part of the new, more Hollywood-friendly trade agreement the sides hammered out last year. The flap held up months of payments to all six major studios, who refused to cash checks with the tax taken out.
But the pending IPO didn't just help Hollywood's short-term fight: Public ownership of China Film Group would have an overall positive impact on the U.S. movie business, several executives tell TheWrap. That's because foreign investment could neuter China Film Group's protectionist and secretive modus operandi, pushing the company to act in a more profit-oriented — and transparent — manner.
"As a publicly traded company that may be looking for overseas investors, China Film Group will have to adhere to a higher standard of corporate behavior," Robert Cain, the founder of Pacific Bridge Pictures and a consultant with over 30 years of experience working in China, said. "At the moment they are not impacted by public or Wall Street opinion, so they don't feel much pressure to avoid embarrassment or to reward or penalize their top executives based on the financial performance of the company."
That increased emphasis on maximizing profit may cause China Film Group and its state partners to behave in a less capricious — and at times retaliatory — manner. In the past, Chinese authorities have worked to undermine the box office grosses of U.S. film releases by scheduling major tentpole films like "The Amazing Spider-Man" and "The Dark Knight Rises" to open against each other.
It would also require the company's leaders to be more forthcoming about its balance sheet and cash flow.
Also read: Hollywood's Trouble With China? It Has All the Leverage
Film executives say privately that they suspect that the push to go public may be part of the reason China has been more willing to offer release slots to U.S. films. "World War Z" and "Despicable Me 2" are the only major summer films denied a berth in China, and films like "Pacific Rim," "White House Down" and many others have debuted or will premiere in the country in the next few weeks.
Cain and others said they doubt the messy spat with studios over box office receipts would have dragged on had China Film Group been a public company.
China Film Group is hoping that it will debut on China's stock exchange in the next six months, which may be pushing the government to broker some sort of agreement, a foreign film executive told TheWrap last week. The company is reportedly looking to raise between 3 billion yuan ($480 million) and 4 billion yuan ($640 million) as part of the offering.
One potential flaw in the theory that a public debut will usher in an era of improved relations: China Film Group may not be interested in attracting foreign investment at all. If that's the case, a combative relationship with Hollywood may actually play well with a local audience.
"Chinese investors look at something like the box office negotiations and see it as a sign of strength and power and something that attracts rather than detracts investment," a media executive who declined to be identified because it could impact his relations with Chinese companies said.
Even with an agreement in place, some scars will remain. With its burgeoning population of moviegoers, strong economy and soaring box office, China is seen as a crucial way for the industry to replace falling DVD revenue and to find new sources of capital investment. Some of that enthusiasm may have diminished.
"The gold-rush mentality that Hollywood had will get to be a little bit more realistic," Stephen Saltzman, an attorney with Loeb & Loeb who has worked extensively with Chinese companies on entertainment and media deals, said.
Like Cain, Saltzman agrees that going public may change the way that China Film Group distributes U.S. made films and its negotiating tactics, but he also believes that larger forces may impact relations.
"In general, I think globalization will have just as much of an impact as [China Film Group] going public," Saltzman said. "Over the longer term I think we will see the government growing more comfortable with having more non-local films come into the country, but over the short term we may not see a big change on issues like pitting tentpole pictures against each other and blackout periods."