Chinese conglomerate Dalian Wanda Group acquired Legendary for what was announced as a $3.5 billion deal in January — the first time a major U.S. production company has come under Chinese control. (Though many in Hollywood and elsewhere say the actual price will turn out to be lower.)
Headed by Wang Jialin, China's richest man, Wanda currently is in the process of merging its film production holdings — including Legendary — with a publicly traded subsidiary, Wanda Cinema Line, which is China's largest movie theater operator. Entertainment stocks have been particularly hot on the Chinese markets, and the maneuver is expected to raise large sums of capital as Wanda's production operations become accessible to Chinese investors. But the impending transaction also has forced Wanda to disclose previously private financial data on Legendary.
The 355 pages of new documents obtained by The Hollywood Reporter show Legendary, which has backed such highly profitable films as Jurassic World and the Dark Knight films but has had less success in producing its own films, suffered a loss of $343.4 million (2.43 billion RMB) in 2014 on revenue of $403.3 million (2.63 billion RMB). In 2015, the company's losses deepened to $555.6 million (3.63 billion RMB) on revenue of $462.1 million (3.02 billion RMB).
The document cites several key factors behind the losses: "a substantial increase in non-cash, stock-based compensation expenses amid accelerated vesting of management options, higher advertisement and promotion cost and writedowns."
The accelerated vesting of stock options is understood to have taken place as Legendary allowed senior management to cash out in anticipation of the Wanda acquisition. Writedowns included such Legendary-backed flops as Seventh Son (2014) — a $95 million-plus fantasy that grossed only $114 million — and Michael Mann's $70 million Blackhat, which earned just $19.6 million worldwide.
Guillermo del Toro's Crimson Peak (2015) and Danny Boyle's Steve Jobs (2015) also were financial losers as part of Legendary's distribution arrangement with Universal Pictures.
Increased P&A costs could be attributed, in part, to the forthcoming release of Duncan Jones' $100 million-plus Warcraft, which is set for release in June. Legendary also wrapped production late last year on the $160 million China-U.S. co-production The Great Wall, which stars Matt Damon and Andy Lau, features English and Chinese dialog and is due out in 2017. The high-profile project is being closely watched as a test case for the viability of Chinese-themed global tentpoles.
While the losses are substantial, the numbers don't necessarily suggest that Wanda's chairman Wang got a bum deal in the acquisition, analysts say. The more common measure for valuations of media companies engaged in production activities is an EBITDA number (Earnings before interest, taxes, depreciation, and amortization), as it provides a clearer picture of operating performance. Other factors commonly considered are revenue multiples, distribution agreements, upcoming film slates, intellectual property pipeline, premium for control, along with other intangibles such as brand names and position in the market.
"Not only are all of those factors things Wanda considered in their acquisition, but they are factors that Wanda would want to be present in one way or another when they not only identified Legendary as a target but decided to proceed with the transaction," says Peter Schloss, managing partner of CastleHill Partners, a Beijing based merchant bank specializing in the media and sports industries.
The documents reveal that Legendary's $3.5 billion price tag was 7.5x its 2015 revenue of $462.1 million (the next best measure since EBITDA numbers weren't disclosed) — "possibly on the high side, but not unreasonable," Schloss says.
The Wanda filing document also forecasts Legendary's combined net profits for 2016-2018 will be $474.8 million (RMB 3.1 billion). Net profit projections of this kind are unusual in the U.S. business community. Its inclusion was most likely a filing requirement under Shenzhen Stock Exchange rules.
According to financial sources familiar with Chinese to U.S. accounting calculations, Wanda's net profit forecast translates to approximately $640 million EBITDA for 2016-2018.
Wanda and Legendary have both declined to comment.
Source: The Hollywood Reporter by Patrick Brzeski