Did you hear about the biggest deal done in Hollywood? According to Forbes just before Christmas Thomas Tull, the billionaire founder of Legendary Entertainment, was smack in the middle of a deal to sell his studio to China’s richest man, Wang Jianlin, and his Dalian Wanda Group.
Pacing the floors of his massive home in the tony Westlake Village complex just outside of Los Angeles, he first had to explain the deal to his consortium one by one, a varied bunch that ranged from institutional giants like Fidelity and Morgan Stanley MS +6.45% and Japan’s SoftBank to individuals like billionaire venture capitalist Jim Breyer. Then came the near-impossible task of minimizing taxes on both sides–every shift in the terms invariably caused repercussions for one side or the other. Finally Tull had to navigate the Chinese regulatory system, which forbids foreigners from owning stakes outright in entertainment companies–a problem, since Tull, who would continue in his CEO role, wanted to hold on to his 20% or so stake of Legendary. In the end, knowledgeable sources told FORBES, Tull likely had to make do with phantom stock, a China-friendly workaround that would mimic actual ownership, giving him a yearly payout plus 15% to 20% of the profit if the company is sold. (Legendary would not confirm this arrangement.)
Such details were the culmination of a two-year process that started with a lunch at Wanda’s headquarters in Beijing in late 2013. Legendary, which has co-produced blockbusters such as The Dark Knight and Godzilla, had recently partnered with state-run China Film Group to develop movies in the country. He gained access to a burgeoning market–it will surpass the U.S. next year as the world’s largest–and a near-sure distribution channel in a place that permits only 34 foreign films annually. The previous year Wang had snapped up U.S. cinema chain AMC for $2.6 billion, taking the first step in what would become a string of international entertainment acquisitions to broaden the scope of his real estate conglomerate.
The deal marks several Hollywood milestones. Five of the six major studios–20th Century Fox , Warner Bros., Paramount, Disney and Universal–have scored investment from China or formed joint ventures overseas in the last 18 months, but this will be the first complete buyout of an American movie studio. “Legendary is a gateway to cultural and financial alignment between the Hollywood moviemaking world and the rapidly expanding Chinese marketplace,” Wang says. Second, it will show that the comics-driven blockbuster formula can yield profitable exits even for companies that aren’t named Marvel or DC. Third, it would validate the data-based Moneyball strategy that has been all the rage in Hollywood over the past decade but has looked rather stupid lately.
The sale would also be a stunning triumph of dealmaking for the 45-year-old Tull. Disney paid $4.1 billion for Lucasfilm and the mighty Star Wars franchise and another $4 billion for Marvel and a character universe–the Hulk, Thor and Captain America–that collectively is the highest-grossing franchise of all time. What does Wang’s $3.5 billion, which includes some $900 million in debt, buy him? “It’s not exactly clear what they are paying for, even at a premium valuation,” said Dan Clivner, a Los Angeles-based partner at law firm Sidley Austin who specializes in mergers and acquisitions.
Legendary uses its money and production savvy to produce other people’s franchises: Most of its biggest hits, whether The Hangover or Jurassic World, have been jointly produced with Warner Bros. or Universal, its most recent distribution partner, using intellectual property they own. It has had some success licensing properties–Godzilla is licensed from Toho–but that can’t justify the valuation, either. Legendary boasts about the content it owns, but there’s no way Pacific Rim, along with a small horror movie and three disappointments, can almost equal the value of Star Wars. Not even close.
Ultimately Wang seems willing to vastly overpay to get a controlling stake in a Hollywood entity, no small feat. China’s second-richest man, Jack Ma, sources tell FORBES, has repeatedly been thwarted in his efforts to take over Paramount and other studios, versus making a minority investment. (His Alibaba Pictures cofinanced Paramount’s Mission: Impossible–Rogue Nation last year.)
Wang is also betting on Tull himself. Rather than follow the century-old tradition of Hollywood-insider fleecing starry-eyed outsider, Tull won’t cash out anything from the deal. While his investors will do magnificently, Tull is sticking with his phantom stock–he’s betting on the future, on the same side as Wang. With Legendary at the center of seemingly every major movie business trend, understanding what Tull has built, and where he’s going, provides an insightful microcosm of the future of Hollywood itself.
