How Will Financial Aid From Chinese Firms Help Paramount Pictures In Near Term?

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Viacom’s (NASDAQ:VIA) Paramount Pictures has reportedly signed a deal with two Chinese companies, Shanghai Film Group and Huahua Media, providing the studio with much-needed cash and support as it attempts to grow under the new leadership of Viacom CEO Bob Bakish. With this deal, Paramount would receive a $1 billion cash investment from these two firms, who would co-finance 25% of Paramount’s entire schedule for three years with an option to extend the agreement for the fourth year. [1]

Paramount can build a stronger slate of films and produce as many as 15-17 movies per year with the help of this Chinese infusion of cash. In addition, this deal would also help Paramount with the release and marketing of its films in the Chinese market. In fact, there is also a possibility of Paramount using this Chinese partnership to produce films in China as well at some point in the future.

Viacom’s movie business has been struggling for a while now, due to a relative lack of big hits. The company’s operating income for its Filmed Entertainment division declined 46% year-over-year (y-o-y) in fiscal 2016 (year ended September). We estimate that Paramount contributes less than 5% of Viacom’s total value, despite a 21% revenue contribution to the company. The primary reason for such a low contribution is the low margins associated with this business. Moreover, Paramount’s global box office market share has declined from over 10% in 2009 to around 7.7% in 2016. [2] During this period, the studio sold the rights to some popular titles to other studios. Given the low value contribution, any efforts from China may be of little value to Viacom shareholders, but could bode well for the studio itself.viacf2viacf1

China Offers Tremendous Growth Opportunity 

This agreement also marks Paramount’s first major move in China since Viacom’s former CEO tried to sell a 49% stake in the studio to Chinese conglomerate Dalian Wanda group for about $4 billion last year. Many U.S. studios such as Warner Bros, Walt Disney Co, Dreamworks, Lionsgate and STX Entertainment have all made deals with Chinese firms to fund productions or help boost their presence in China’s fast-growing film market. In 2015, Paramount worked with Alibaba Pictures Group to promote Mission: Impossible – Rogue Nation in China.

There is massive demand for movies in China, as evident by the market’s box-office grossing, which grew from a little under $1 billion in 2009 to around $6.5 billion in 2016. Furthermore, China allows only a limited number of new Hollywood films on a revenue-sharing basis, allowing U.S. distributors to collect 25% of box office revenue. ((China’s limit on imported films relaxed amid box office downturn, The Guardian, Nov 2016)) A relationship with Chinese companies could help Viacom grab a slight bigger piece of the fast-growing Chinese movie market going forward and also grant the studio the ability to bypass China’s foreign film quota. In 2016, the U.S. box-office market increased 2.2% y-o-y while the Chinese box-office market grew 3.7% y-o-y. Also, China is expected to overtake the U.S. as the world’s biggest film market by 2019. [3] Given these factors, China could provide a massive growth opportunity and accordingly, U.S. based studios are eyeing a share of the market. Moreover, China also hopes to tap into Hollywood’s expertise as it builds up its own entertainment industry and grow its domestic film industry further.

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Notes:
  1. China extends Hollywood push with $1 billion Paramount investment, Reuters, Jan 20 2016 []
  2. Box Office Mojo []
  3. China’s Ascent to No. 1 Film Market Now Stalled Until 2019, Variety, Nov 2016 []