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News Corp. buys stake in Chinese film studio

May 14, 2012 | 12:46 pm

BEIJING – Twentieth Century Fox parent News Corp. has agreed to acquire a 19.9% stake in Beijing-based Bona Film Group, the latest attempt by Hollywood to cash in on Asia’s biggest movie boom. It also signals the global aspirations of China’s second-largest independent movie production and distribution firm.

News Corp’s investment comes after a 30% jump in China’s box office sales last year to $2.1 billion. In the first quarter, China passed Japan as the largest overseas theatrical market for Hollywood films. Government forecasts show it should catch up with the U.S. box office by 2015.

Bona’s 2011 3-D release “Flying Swords of Dragon Gate,” took in $68.9 million in China, ranking fifth ahead of “Harry Potter and the Deathly Harrows -- Part 2.” The martial arts epic directed by Tsui Hark and starring Jet Li will get a limited North American release in IMAX theaters in September.

“We are committed to bringing the best quality Chinese films to broad audiences around the world,” Yu Dong, Bona’s chief executive said in a statement. “News Corporation's extensive global reach, investment and distribution will help accelerate our strategy to expand our global footprint.”

The investment by News Corp. was seen by industry observers as Chief Executive Rupert Murdoch’s latest in a long string of attempts to crack China’s strictly regulated media and entertainment market. In the past, he complained about the country's thicket of opaque regulations, refocusing the company’s Star TV unit on India in 2009.

Murdoch's film studio 20th Century Fox, like all its Hollywood rivals, faces a high barrier to entry in China, where the government bars imports from taking home more than 25% of sales. The number of annual film imports China allows to share in ticket sales rose to 34 from 20 earlier this year. Fox is currently enjoying the spotlight here with the 3-D release of James Cameron’s 1997 blockbuster "Titanic,” which has grossed more than $100 million for state-run distributor China Film Group, the country’s sole licensed importer.

One way around the China Film Group bottleneck is to co-produce films that are not limited in number nor are as severely restricted in how much money they can repatriate. Fox International Productions already has made a few Chinese-language co-productions with modest success.

"One of Bona's unique advantages is its vertically-integrated business model, which differentiates the company from other film distributors in China," Jack Gao, News Corp’s chief executive for China investments, said in the statement from Bona.

A News Corp. spokesperson who asked not to be named when reached by phone on Monday said: “All our affiliates, including 20th Century Fox, from time to time work with local partners. There will be collaboration opportunities but we have nothing concrete planned yet.”

Hollywood’s dealings in China recently came under scrutiny when the U.S. Securities and Exchange Commission sent letters of inquiry to several studios, including Fox, asking about their business practices here.

David Wolf, an independent Beijing-based media analyst, said the investment in Bona looked like News Corp. playing “catch up” after a raft of recent pan-Pacific tie-ups, such as one between Hollywood’s Legendary Pictures and Orange Sky Golden Harvest of Hong Kong and Beijing; DreamWorks Animation’s plans to work with the Shanghai Media Group and two other state-run partners to build a studio in Shanghai; and the Walt Disney Co.’s plans to work with the Ministry of Culture and Tencent, China’s largest Internet company, to develop animation in China.

“What we are seeing is a new willingness by the big Hollywood studios to come into China with a minority stake hoping to gain a foothold and leverage up over time,” said Wolf, who added that it was difficult to put a value on the News Corp. investment in Bona.

China is also looking to expand its presence in North America. The Wanda Group, the largest theater operator in China, is in talks to acquire part or all of AMC Entertainment, the second-largest cinema circuit in the U.S. and Canada.

News Corp. purchased its stake in Bona directly from Yu, who, according to the company's statement, recently bought 1.5 million ordinary Bona shares from the Sequoia Funds and 1 million shares from both SIG China Investments One and Matrix Partners China Funds at an average of $11.40 per share, or $5.70 per American Depositary Share (ADS). The restructuring reduced Yu’s stake in Bona to 27% from 37.2%.

Analyst Dick Wei, J.P. Morgan Chase's head of Asia Internet and new media research in Hong Kong, said in a research note that it was “positive” for Bona, a client, to move away from venture capital partners and take on strategic investors who could bring “long term value for the business.”

In the note, Wei added, “The transaction should lift Bona’s brand image in global movie industry. We expect News Corp (Fox) to bring U.S. production expertise to Bona, creating more opportunities on high-quality joint-productions. In addition, News Corp will help Bona build up a global presence to distribute its own domestic productions in international market."

Chinese law classifies film and television as “restricted” industries and there is little or no clear precedent for successful foreign direct investment in these sectors.  An attempt by Warner Bros. to break into China’s cinema business ended in 2006 when the studio pulled out after three years following a change in rules by the Chinese government that barred majority ownership. Warner’s cinemas in China were ceded to the CFG.

Neither Bona nor News Corp. responded to multiple phone calls and emailed requests for further information on Monday.

Bona, which is China's only U.S. listed film studio, last week posted first quarter net income of $2.3 million, up 3.4% from the same period a year earlier. First quarter net revenues rose 126.8% to $43.7 million.

Bona shares, first listed on the Nasdaq in 2010, have risen 10.74% over the last year and closed on Friday in New York at $5.98 each, near the upper end of a 52-week range that topped out at $6.30.


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-- Jonathan Landreth