ENTERTAINMENT: Spurned by Paramount, Wanda Settles for Sony

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Bottom line: Wanda’s new production tie-up with Sony Pictures will provide movies for its cinema chains in  China and globally, but could become a drag on its theater operations if the films are poorly received.

Wanda opens new resort in Hefei

Just days after receiving a major setback to its plans to invest in Paramount Pictures, Chinese Hollywood wannabe Wanda Group has just announced a film production tie-up with Sony Pictures. This particular deal looks decidedly like a consolation prize for Wanda, which is trying to build up a diversified entertainment empire similar to Disney (NYSE: DIS).

The company was bidding for a stake in Paramount, one of the top 6 Hollywood studios, after the studio said earlier this year it wanted to sell a strategic stake in itself. But Paramount ultimately reversed that decision following an internal battle for control of the company’s parent Viacom, leaving Wanda out in the cold. (previous post) This new Sony tie-up doesn’t involve any equity swap, and instead looks mostly like a relatively routine co-production deal that is becoming quite common between Hollywood and Chinese partners.

At the same time, Wanda is also in separate headlines as it prepares to open a 35 billion yuan ($5.2 billion) mega entertainment resort in a provincial capital about 500 kilometers (300 miles) away from Shanghai. We’ll look at that particular opening shortly, which comes just 3 months after Disney opened its strikingly similar Shanghai Disney Resort and reflects Wanda’s ambition to fashion itself after the US entertainment giant.

But first let’s begin with the new tie-up between Wanda and Sony, which was rumored earlier this week and confirmed by Wanda on Friday. The official announcement is quite general, saying only that the pair have signed a strategic partnership that will open the way for Wanda to invest in future Sony films. (English article)

The announcement calls the agreement “open ended” and says Wanda wants to invest in films with Chinese elements, presumably to screen those films in its home China market. Wanda is trumpeting this deal as ground-breaking, saying it will mark the first time for such a broad alliance that isn’t limited to a single film. It’s also saying it will get to provide input for films it co-produces, unlike earlier arrangements where the Chinese investors were limited to mostly passive roles.

But the bottom line is that Wanda is having to settle for this kind of co-production tie-up rather than the equity investment it was hoping to make in Paramount, which could have totaled about $1 billion. Reports earlier this week cited unnamed sources, most likely from Sony, saying that Wanda would provide up to 10 percent of the investment for future films under the alliance. If that figure is true, it seems to indicate Sony intends to remain firmly in control of films produced under the tie-up, and Wanda’s role could be quite limited.

Wanda made headlines last year when it bought smaller Hollywood studio Legendary Entertainment for $3.5 billion. It also owns US cinema giant AMC Entertainment (NYSE: AMC), announced a deal earlier this year to buy European theater operator Odeon, and is trying to buy smaller US theater operator Carmike (Nasdaq: CKEC). All of those operations complement its own position as China’s largest cinema operator, and give it a very strong platform for distributing any films it makes at Revolutionary Entertainment, or in the new tie-up with Sony or with other partners.

New Theme Park in Hefei

That bit leads nicely into the theme park story, which is the third major plank in Wanda’s growing entertainment empire after film production and cinemas. Wanda has announced a steady string of major new theme park-anchored resorts over the last couple of years, mostly in mid-tier Chinese cities and often costing billions of dollars each. The latest of those, called Hefei Wanda City, is in the provincial capital of Anhui province and will officially open over the weekend.

In addition to a theme park at its center, the new resort will include hotels, a movie theater, shopping center and also a residential element, reflecting Wanda’s roots as a real estate developer. The new complex is just one of 15 Wanda Cities the company is building around China, including the first one that opened 3 months ago in Nanchang, another provincial capital a similar distance from Shanghai.

Wanda’s formula looks decidedly different from Disney because it includes movie theaters and lacks a merchandise element that is central to Disney’s success. Wanda’s choice of smaller cities and far more resorts is also quite different from Disney, which only opens such resorts in major global cities and has just 6 worldwide.

The theater ownership could help Wanda’s film production business not only in China but around the world, but also is slightly risky if those films aren’t popular. As to the resorts, I’ve previously said the company’s selection of these smaller cities and the much bigger number of parks looks misguided due to low visitor flow. Consequently, I’ve also expressed my belief that many of these Wanda Cities will end up as multibillion-dollar duds.

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