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Paramount’s Billion-Dollar Deal With Chinese Partners Hits Major Snag (EXCLUSIVE)

Variety logo Variety 3/9/2017 Patrick Frater
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Even as Paramount struggles with a change in leadership, the studio’s much-ballyhooed deal to receive $1 billion of slate funding from two Chinese companies has hit a major road bump, encountering the same bureaucratic and financial difficulties that have recently slowed down other Chinese acquisitions and investments in Hollywood, sources close to the deal say.

The alliance with Shanghai Film Co. and Huahua Media would see the two Chinese firms invest in Paramount’s entire theatrical output over three years, including movies not granted a release in China. The pact was hatched last November and unveiled amid much fanfare in January.

But China’s new clampdown on money leaving the country is preventing the deal from moving ahead as scheduled. In particular, sources say, Shanghai Film Co., which is majority state-owned, is having trouble transferring its share of the first installment of the $1 billion from China to the U.S. because of the tightened capital controls. Whether that obstacle can be overcome is unclear.

Efforts to reach Shanghai Film Co. for comment were unsuccessful.

Its partner in the deal, privately held Huahua Media, already has plenty of funds overseas and is largely unaffected by the currency controls. While sources close to Huahua acknowledged that the capital controls were a problem, the company expressed confidence that the agreement with Paramount would go through. “Huahua will continue to bring quality films to audiences and further our long-term cooperation with Paramount. We have made active progress and have no doubts about the deal,” the company said in an emailed statement.

The Chinese government tightened access to foreign exchange in the second half of last year after the renminbi fell 6.5% against the dollar and prompted a flood of money to leave the country. In 2016, outbound investment exceeded inbound investment for the first time in recent years.

Shanghai Film Co. successfully floated on the Shanghai stock exchange last August, raising $136 million and seeing its shares more than triple. But because it remains majority state-owned, it has little chance of skirting the new regulations, even though the Paramount deal bears relatively low risk and is not a wild diversification from Shanghai Film Co.’s core business.

One possible solution to the holdup of the deal is for Huahua to use its overseas capital to make the first full scheduled payment of about $150 million on behalf of both Chinese parties. Whether Shanghai Film Co. immediately repays Huahua in China for its share or whether that amount gets treated as a longer-term loan from Huahua to Shanghai Film Co. is not known.

It’s unclear if the deal would collapse completely if the scheduled deadline for the first payment were missed, or if there is leeway on a start date for the deal.

There seems to be a high degree of goodwill between the three companies, which suggests room for maneuver. Huahua has already invested in several Paramount titles, including “Star Trek Beyond,” “Transformers: Age of Extinction” and “xXx: The Return of Xander Cage,” which in China is currently a $162-million smash hit. Huahua and Shanghai Film Co. are also scheduled to open a joint office on the Paramount lot.

This is not the first entertainment deal to be affected by China’s capital controls. The new regulations also appear to have played a role in slowing Dalian Wanda’s $1-billion purchase of Dick Clark Productions and in killing off Anhui Xinke’s proposed acquisition of Voltage Pictures.

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