Dalian Wanda, the $16 billion private Chinese conglomerate that operates in the commercial real estate, culture & entertainment, and retail industries, announced on Sunday that it has signed an agreement to purchase AMC Entertainment and its 5,048 screen North American theater chain for the sum of $2.6 billion. Wanda has indicated that it will also spend an additional $500 million on theater renovations and technology upgrades.
Last week I laid out a detailed argument that the acquisition doesn't appear to make much sense for Wanda. Now that a deal has been announced I still don't see any compelling business reasons for it. The rationales offered by Wanda's billionaire chairman Wang Jianlin have so far been unconvincing, the following being representative of his statements:
If there were competitive advantages to becoming a very big global player in the cinema business, someone would have done it before. Size alone, and global reach, offer no discernible strategic advantages in a business whose customers' movie-going choices are purely local ones. There may be some scale economies such as increased bargaining leverage in dealing with suppliers of films, equipment, and popcorn, but these hardly justify paying a peak market price for an aging cinema chain with limited growth prospects and low profitability.
The opportunity costs for Wanda are huge. The $3.1 billion they're spending on AMC could instead have acquired or built thousands of Chinese and Asian cinemas. Wanda could have chosen to amass a huge market share in a very fast-growing, profitable territory. But they didn't.
So what, then, are Wanda's true motivations for buying AMC? How does Wang Jianlin benefit? Herewith, a few theories.
The AMC purchase might simply be a vehicle for Wanda to move a large sum of money from "soft" Chinese currency into hard American greenbacks. Theaters are a cash business, and Wanda could eventually take AMC public, which would be a nifty way for the company to shift a chunk of its asset base and grow it in the relatively safe haven of the U.S.
Location, location, location
Dalian Wanda, the parent company of Wanda Cinema Line, is mainly in the business of commercial real estate in China. And commercial real estate in China hasn't been a very appealing business lately, with government regulation, tight debt policies, and a slowing economy all contributing to a downturn in the sector. So Wanda may see AMC as a better mid- to long-term bet than its core real estate development business. We've already seen one hobbled Chinese real estate company, Paul Y Engineering, attempt, unsuccessfully, a foray into entertainment with Legendary Pictures. But unlike Paul Y, Wanda already has a presence in the movie business.
Political troubles at home
At least part of Wang Jianlin's business rise can be attributed to his close dealings with disgraced politician Bo Xilai, who was once the party chief of Dalian, where Wanda is based. Although Wang denies he is being investigated, he must be thinking about the possibility of future political fallout from the Bo scandal. AMC will give him a nice business escape hatch if he needs it.
AMC could serve as the first element of a vertical integration strategy under which Wanda would get into financing, production and distribution of Hollywood style films for the global market. Wanda has already begun to develop and produce films in China, and an understanding of how both the U.S. and Chinese markets work will become increasingly valuable, as the two film markets combined will likely account for about 40 to 45 percent of total world box office receipts by 2020.
I may be going out on a limb here, but the fact that Wanda will now have a major beachhead in the world's most important media market could greatly enhance Wang Jianlin's standing with the Communist Party. The party leadership has repeatedly emphasized the critical importance of soft power initiatives, especially in the west, and with AMC Wang will now have China's largest mouthpiece in the U.S. It's unlikely that AMC theaters will be running the Chinese national anthem before screenings of Communist Revolution-set propaganda dramas any time soon, but Wanda can now position itself as leading the charge in spreading Chinese values to the west.
Of course, Wang's motives might be much simpler than all of this. As James Marsh, an entertainment industry analyst at Piper Jaffray & Co. put it, "I think this is more of a vanity purchase than anything else." And he may be right.
Wang has granted an interview to at least one major U.S. newspaper this week, so we may learn more about his thinking in the coming days.