Here's Why Paramount Needs the Wanda Deal
On Thursday morning, the news broke that China's Dalian Wanda Group Co. was in talks with Viacom (VIAB) - Get Report to buy a 49% minority stake in Paramount Pictures. Given the Viacom soap opera that has seen majority share owner Sumner Redstone and CEO Phillippe Dauman struggle for control of the company, the deal is far from a sure thing, but it would be a boon for Paramount were it to go through.
That's because Wanda has strong ties to the Chinese movie industry, which has been expanding at a breakneck pace over the course of the past five years. The conglomerate owns Wanda Cinemas, China's main cinema operator, and Legendary Entertainment, the studio behind huge Middle Kingdom hits such as "Pacific Rim" and "Warcraft." Were Paramount to become partially owned by Wanda, it would have a huge conglomerate invested in the success of its movies in what is soon to be the world's largest film market.
"If you have an outpost in the country where you're going to do the biggest business, you can really mold that movie, both on the creative side and the marketing side, to get a bigger bang for your buck in China," says ComScore (SCOR) - Get Report analyst Paul Dergarabedian.
A partnership between Paramount and Wanda would also facilitate the process of securing Chinese releases for the studio's films. China allows just 34 non-Chinese films to be released every year, and when a studio does get a release in the Middle Kingdom for one of its films, it typically only sees 25% of the movie's box office returns there. Allowing Wanda to buy a stake in Paramount could begin to solve both problems.
"The deal would allow more foreign films to bypass Chinese censors, plus ease various market restrictions like box office revenue splits," says Shawn Robbins, senior analyst at BoxOffice.com.
The hypothetical stake purchase would certainly have an effect on the accessibility of content, but could it also affect the content itself? A stake purchase by Wanda would not necessarily be likely to alter the creative vision of Paramount, but studios have increasingly been producing content with Chinese audiences in mind anyways. A deal with Wanda may accelerate that process, and assist in maximizing the outreach of Paramount films.
Take Legendary Entertainment, which was acquired by Wanda back in April. The studio released "Warcraft" to record-breaking box office results in China, aided by Wanda Cinema Line, which fully supported the movie in its theaters. Wanda also arranged for promotional seat covers which allowed moviegoers to choose the side of the Horde or the Alliance, the two groups at war in the "Warcraft" film. If it weren't for Chinese box office returns, the movie would have been a huge dud, which speaks to the power of having a conglomerate like Wanda behind one's back in the Middle Kingdom.
And indeed, the studio's upcoming movies seem primed to make bank in China. "Legendary's upcoming release slate is well suited for major Asian markets," Robbins says. He points out that the studio has three Godzilla-related movies in the pipeline, as well as an American-Chinese 3D fantasy film about the Great Wall of China. And if Legendary can successfully land the rights to a Pokemon film--well, there's no telling how high the box office might go with the help of Wanda.
Paramount could reap the same benefits that Legendary has if its shareholders accept the deal. The box office results speak for themselves; China is where studios now need to be looking for revenue, and a deal with Wanda could give Paramount the leg-up on the competition that it desperately needs.
"For a Chinese company to buy a huge stake in an iconic Paramount--it tells you where the money is," says Dergarabedian. "It's all about the growth in China." If Viacom shareholders cannot realize that, they may just be digging their own graves.