MEDIA: Wanda, Baidu Spurned by Film Partners

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Bottom line: Wanda will look for new Hollywood assets after being rejected in the bidding for a stake of Paramount, while the departure of a member of the group buying Baidu Video is a minor setback and a new investor will be easily found.

Paramount abandons stake sale plan

A couple of headlines are showing that China’s love affair with the film and video industries isn’t always so smooth, with the collapse of 2 major deals involving cinema giant Wanda and online search leader Baidu (Nasdaq: BIDU). The far larger of the 2 developments has seen leading Hollywood studio Paramount scrap plans to sell a strategic stake in itself, ending a deal that reportedly had seen Wanda emerge as one of the most likely buyers. The Baidu deal is quite a bit smaller, and has seen one of the buyout partners withdraw in a plan to spin off its relatively minor Baidu Video business.

Let’s jump right in with the Paramount story, with a development that I predicted last month. (previous post) This latest development really has very little to do with Wanda, which has become one of the world’s top cinema operators and also made headlines last year with its $3.5 billion purchase of Hollywood studio Revolutionary Entertainment.

Instead, Paramount’s new reversal of its earlier decision to sell a strategic stake in itself is the result of an internal battle for control at the company’s parent, Viacom (NYSE: VIAB). The loser in that internal battle was Viacom’s former CEO Philippe Dauman, who crafted the original plan to sell the strategic stake in Paramount. Many had forecast Viacom would find a Chinese partner to help tap that country’s booming box office.

The winner of the internal battle was Sumner Redstone, Viacom’s controlling shareholder, who considered Paramount a key asset and didn’t favor selling a strategic stake. As a result of Redstone’s victory and Dauman’s ouster, media are now reporting that Paramount has officially scrapped its plan to sell a stake in itself. (English article; Chinese article)

Previous reports had indicated that Wanda and Chinese Internet giant Tencent (HKEx: 700) were among the parties interested in buying the stake, which could have raised about $1 billion. I had also predicted that e-commerce giant Alibaba (NYSE: BABA) might have been eyeing the stake using its separately listed Alibaba Pictures (HKEx: 1060) as the acquisition vehicle.

But Wanda looked like the most likely candidate due to boasts last month by billionaire chief Wang Jianlin that he expected to complete 2 deals worth $1 billion or more in the near future. One of those was likely to be US cinema chain Carmike (Nasdaq: CKEC), which Wanda is currently trying to buy. The other looked like a probable reference to Paramount.

Video Partner Abandons Baidu

Next let’s look at the far smaller deal that has seen Shenzhen-listed Zeus Entertainment (Shenzhen: 002354) abruptly pull out of a group that was buying Baidu Video, operator of a video platform that is being spun off from its larger parent. (English article; Chinese article) Zeus had previously pledged to invest 118 million yuan ($17.6 million) for 10 percent of the company when the deal was first announced back in April.

Zeus’ withdrawal from the group appears to be for technical reasons, since foreign companies aren’t allowed to own such video sites in China. While Zeus itself is Chinese, some of its stakeholders come from Taiwan, Hong Kong and Macau, which forbids it from holding an audio-visual broadcasting license in China.

It’s apparent from the size of Zeus’ investment that Baidu Video is quite a small company, since its total market value would only be around $176 million based on the price of Zeus’ stake. Accordingly, Baidu should easily be able to find another alternate investor. More problematic is Baidu’s far larger iQiyi video service, whose spin-off from the parent hit a roadblock in July after US investors complained the unit was being grossly undervalued in its sale to a group that included Baidu chief Robin Li. (previous post)

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