Regulators quashing deals for star-founded companies due to sky-high valuations

By Wang Jiamei Source:Global Times Published: 2016/7/4 19:53:01

China's film and TV production companies have been spending big on companies founded by famous stars to get access to the country's hottest talent. Yet, as an increasing number of deals involve suspiciously high premiums, regulators have taken a greater interest in such high-priced acquisitions.

Chinese actress Fan Bingbing plays the title heroine in the TV drama The Empress of China, which was aired in February 2015. Photo: CFP

Shenzhen-listed Zhejiang Talent Television & Film Co abandoned its plan to purchase Chinese actress Fan Bingbing's company on June 26, as China's securities regulators have increased scrutiny over expensive acquisition deals, experts said.

Zhejiang Talent failed to reach an agreement with Wuxi Aimeishen Movie & Culture on the proposed acquisition, so the parties decided to terminate the deal, Zhejiang Talent said in a filing on the Shenzhen Stock Exchange on June 24.

Analysts generally believe that heightened regulatory supervision was the major reason for the deal's failure, and some suspected that the deal could have hurt investor interests.

Zhejiang Talent had planned to acquire a 51 percent stake in Wuxi Aimeishen Movie & Culture in a major asset restructuring deal, according to another filing Zhejiang Talent sent to the Shenzhen bourse on March 27.

The deal raised eyebrows when it emerged that the deal valued Aimeishen at more than 800 million yuan ($120.47 million), a very high premium for a company set up just a few months earlier with 3 million yuan in registered capital.

Aimeishen didn't even receive regulatory approval for its establishment until January 29, with Fan as its legal representative, according to the Chinese National Enterprise Credit Information Publicity System, an arm of the State Administration for Industry & Commerce. Fan and her mother are the company's only shareholders.

Unsurprisingly, the deal caught the attention of the securities regulator in Shenzhen, which on April 11 initiated an inquiry that required Zhejiang Talent to explain just how Aimeishen had increased so much in value over such a short period.

In recent years, China's production houses and talent agencies have been spending big on companies founded by the stars of stage and screen, in a race to capitalize on the careers of the country's hottest talent, experts said.

However, regulators have recently scuttled several high-profile deals for star-founded companies due to their suspiciously high valuations.

Targeting talent

Shenzhen-listed Huayi Brothers Media Corp was the first to purchase a company owned by a star, aiming to align its interests with those of its acquisition.

In 2013, Huayi Brothers paid 252 million yuan for a 70 percent stake in Zhejiang Changsheng Zhang Guoli Television Production, a company partially owned by actor Zhang Guoli.

In 2015, Huayi Brothers spent 1.08 billion yuan to acquire Zhejiang Dongyang Haohan Pictures Entertainment Co, a recently established company backed by six stars with registered capital of 10 million yuan,

It also paid 1.05 billion yuan for Zhejiang Dongyang Meila Media Co, backed by renowned film director Feng Xiaogang.

"Companies are actually paying for the stars," said Oliver Rui, a professor at the Shanghai-based China Europe International Business School.

 "For the film and TV industry, intangible assets like stars are much more important than tangible assets, as they have the capacity to create value in the future," Rui noted.

In the case of Zhejiang Talent, the company is still pursuing cooperation with Aimeishen. It announced in the June 24 filing that the two companies plan to continue to work together by setting up a joint venture.

One of China's most popular actresses, Fan was ranked by Forbes as the fourth highest-paid actress in the world in 2015. She has also appeared in the Hollywood movies X-Men: Days of Future Past in 2014 and Iron Man 3 in 2013.

According to Zhejiang Talent's annual report, its TV business revenue totaled 369 million yuan in 2015, including 198 million yuan - or 51.48 percent of the total - from the TV series The Empress of China, which Fan stars in.

Fan is Zhejiang Talent's 10th largest shareholder.

For its part, the stock market has voiced its support for acquisitions of star-founded companies. Huayi's shares surged 95.23 percent in 2013 and 57.30 percent in 2015, but they fell 5.21 percent in 2014.

"With the rise of China's middle class, there is a growing demand for entertainment, which is expected to boost the film and TV market," Rui told the Global Times Thursday, noting that it is understandable for assets to be overvalued in some cases because optimistic expectations support the stock markets.

China's film market is now the second largest in the world. With an annual growth rate of around 35 percent, it is expected to surpass the flat North American market (the US and Canada) by 2017, according to a report from Japan-based magazine The Diplomat, in May 2015.

High prices

Yet, many question whether the value of stars like Fan has been calculated correctly in such high-premium deals.

"Risks are high when companies are betting big on a star's future, which seems quite suspicious and may be an indication of underneath interest transfer," Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times Thursday.

"The high-premium acquisition has not only exacerbated market speculation, but also increased investment risks. It may also distract directors and actors/actresses from their real business," he noted.

It is against such a backdrop that the securities regulators have recently stepped in.

In March, Baofeng Group Co announced a plan to acquire Daocaoxiong Pictures, a company backed by Taiwan actor Nicky Wu and his wife Liu Shishi, also an actress, for 64.8 million yuan in cash and 151 million yuan in Baofeng's shares.

The deal was rejected by the China Securities Regulatory Commission (CSRC) on June 7, citing the uncertainties about Daocaoxiong's profitability.

The CSRC also barred companies from raising capital via private placements to invest in "virtual sectors," such as Internet finance, video games and films, Beijing-based financial news website reported in April.

Media reports later said such deals are not completely banned as long as they are reasonably priced.
Newspaper headline: Shooting for the stars

Posted in: Insight, Celebrity

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