With the rapidly growing box office, the film and TV industry is becoming a strong force in the Chinese capital market and wins the favor of the investors. However, the intervention of the regulators and the resulted changing security market environment will certainly bring these companies back to the right track of capital market in a more standardized, reasonable and sustainable way.
On Oct.30, 2009, Wang Zhongjun, Wang Zhonglei and Feng Xiaogang walked onto the stage for H. Brothers’ initial public offering, the first film and TV company to go public at the Shenzhen Stock Exchange, which marked the beginning for Chinese film and TV companies to enter the capital market. Shortly after that, the wave of capitalization of the film and TV industry swept across China, with Enlight Media, Huace Film and TV, Talent International Film Co. Ltd and Hulubaina launched the IPO or listed at the A-Share through M&A one after another.
At the same time, given the characteristics of the film and TV industry, the regulatory authorities is strengthening supervision of the film and TV companies. In 2012, the Shenzhen Stock Exchange released the Guideline on Information Disclosure of Listed Film and TV Enterprises, the first specific guideline on one individual industry. At one moment, the M&A of film and TV companies by those listed in the A-Share went out of favor in the market, with the veto of the acquisition of Straw Bear by Baofeng Tech, the adjustment of the cooperation pattern between Talent International Film Co. Ltd and Aimeishen Movie & Culture owned by Fan Bingbing, as well as the delayed capitalization process of Wanda Media and several other film and TV enterprises. In July, the Shenzhen Stock Exchange further revised the Guideline on Information Disclosure of Listed Film and TV Enterprises to intensify regulation. On July 22nd, Stellar Megameida announced that it gained the approval of issuing shares to purchase assets, meaning the successful back-door listing of H&R Century Pictures Co.,Ltd, unveiling a new round of capitalization of film and TV companies.
This article will select several typical cases of listed film and TV companies and analyze the several key steps in the process of going public.
First step: asset consolidation before going public
In the present Chinese film and TV industry, the corporate governance is far from being standardized as many film studios might be controlled by the same shareholders, with intricate business and capital transaction among them. Therefore, before the IPO, the enterprise shall first incorporate all the related companies and assets controlled by the owners, which is similar or the same with the main business, into one system through asset restructuring or M&A. On the one hand, it enables the company to meet the basic requirements to be listed on the A-share, while avoiding horizontal competition, reducing related transaction, optimizing corporate governance and ensuring standardized operation. On the other hand, with the IPO of main business on a whole, it can reduce management costs, achieve synergy of businesses and improve scale economy effect. For those non-listed businesses, the company shall consider sell them or close them when necessary. The above step will help sort out the shareholding ties, optimize business structure and enhance the core competitiveness of the company.
For example, before its IPO, H. Brothers acquired HY. Vision, Zhejiang Tianyi Studio and other companies, as well as carried out assets acquisition ion and transfer, canceled registration of related companies, and completed the integration of film and TV businesses and agencies of artists in three years through transactions such as investment projects transfer and others.
Talent International Film Co. acquired Talent Media, Talent Film, Longyuan Ads, Phoenix Agency, and other companies related to the main business to be listed on the stock market, before its IPO, . Huace Film and TV cut the Shanghai Dace, Huayi International and Zhongjie Pictures, while transferring business of film and TV production and distribution under its control, before its IPO.
The essence of the IPO of a film and TV enterprise is the process of resource integration by the actual person in control of it. Apart from the re-distribution of interest, many actual controller even have no idea of how many companies they have invested. In this process of asset restructuring, what the regulators focus on are the reason for acquisition, the legitimacy of the merging company, the basis for pricing and whether it is reasonable, if the enterprise have paid the consideration in full, whether the business credit is in line with the accounting standards, whether it will do harm to the lawful interests of the enterprise, whether legal procedure is followed and what is the impact on the listed company’s financial situation and operation performance of the asset restructuring.
In addition, in terms of the deals between different film and TV companies controlled by the listed enterprise and actual controller, before applying for IPO, attention shall be paid to the time, sum, cause, purpose, balance and necessity of each debt as well as its impact on the listed enterprise. Other factors to be considered including the interests on the debts, legal procedures, associated transaction bad for the listed company or others, so as to avoid the impact on the capital of the listed company. These are also the focus of the regulators.
Second step: maintain the independence of the listed company
The asset restructuring and acquisition aim to enhance the independence of the listed company, which is at the core of ensuring sustainable profitability of the film and TV company. The listed company shall maintain its independence from other companies controlled by the shareholders in terms of five aspects: asset, human resources, finance, structure and business. These are no longer the requirements for IPO, but failure in them might exert major impact on the sustainable operation.
For most film and TV companies, lack of independence is mainly reflected in the following two parts:
First, lack of internal independence. The reliance on the actual controller might lead to associated transactions, occupation of funds, horizontal competition, corporate governance and other problems. Here, it should be noted that lack of dependence of employees is quite common, and some can be settled through asset restructuring. For example, during the restructuring of H. Brothers, Huayi Advertisement and Xuanying Agency transferred gradually the employees to H. Brother, and some labor relations were substandard. Due to the characteristics of the industry, some employees come from SOEs, who want to remain in the system, instead of private companies. For example, when Talent International Film Co. went listed, Wu Hongliang, Wang Daqing, Zhang Zhe and Lihuan of the management received payment from the company without signing labor contract with it; instead, their organizational affiliation remained with the original SOE, which was the Artistic Creation Center of China Film Group Corporation. The above problems need to be tackled before the IPO.
The other is the lack of external independence. It is reflected in the over-independence on other companies in terms of screenplay, shooting, production, distribution and other parts of film-making. As is known to all, contacts and resources are indispensable for the cooperation and development of film and TV companies and partnership between the strong ones is common, which will also cause trouble for the companies. The key aspects to assess whether a company is qualified for IPO including its capability to be independent in the market, whether it possesses a complete business system from planning to production, whether it has contacts in the TV stations, cinemas, intermediate agencies and online video companies, or relations with partners, producers, directors, actors, and other professionals, whether it is dependent on them, is there any profit transfer, and so on.
(1) Screenplay. There are three main channels for the film and TV companies to acquire the copyright of the screenplay: first, directly purchase the copyright; second, entrust the screenwriter to create the screenplay; the company can either purchase the right of adaptation of novels, cartoons and other works or planning by themselves the topics; third, the company form partnership in the program as the executive producer, with its partners contribute to the copyright of screenplay. In practice, to be qualified for IPO, the company shall be able to independently plan and create the screenplays and possess the final say on the screenplay, without dependence on any particular suppliers.
(2) Production. There are two types, independent production and joint production. In practice, when too much co-production is applies, then the company might be deemed as to have defects in business completeness, independence or sustainable probability.
(3)Post-production. There are two types: independent post-production and contracted post-production. The listed company can decide by itself the mode of post-production.
(4) Distribution. The common ways of distribution including independent distribution and entrusted distribution. The listed company shall choose independent distribution over entrusted distribution, or sometimes they might effectively utilize the channels of the entrusted party. However, if the latter mode is applied too much, then the company might be deemed as not be capable enough to do independent sales or market operation.
(5) In addition, if the above part is entrusted to other companies, then attention should be paid to the reason or necessity; in this way, potential profit transfer can be avoided and problems found can be tackled.
Third step: acquire the approval for the business
In China, the regulation of the production of film and TV industry covers every parts from access, filing and publicity, film-making license, content censor to broadcasting management. The film and TV company filing for IPO shall meet all the requirements.
- Approval of film production and distribution
According to the Item 2 of the Regulations on Film Screenplay Recording and Film Production (No.52 Decree by the State Administration of Radio Film and Television), films which haven’t been put on records cannot be produced and films haven’t been censored cannot be distributed, released, imported or exported.
According to the Regulations on Films (No.342 Decree of the State Council of the PRC), the license system shall be applied to the production, export, import, distribution and release of films. Unlicensed films cannot be produced, imported, exported, or released by any organizations or person.
According to the regulations, for companies to engage in film and TV production, they need first get recorded and obtain the License for Film Production or License for Film Release.
- Permission for the production and distribution of TV dramas
According to the Regulation on TV Dramas (2000 No.2 Decree of the State Administration of Radio Film and Television), and the Regulations on the Production and Operation of Broadcasting and TV Programs (2004 No.34 Decree of the State Administration of Radio Film and Television), a licensing system will be imposed on all the businesses involving the production of TV dramas. Without permission, no organization or individual can engage in any business of TV program production. The TV drama producers, after gaining the License for Production and Operating of TV Drama Production, can carry out business in this area.
According to the above regulations, to engage in the production and distribution of TV Dramas, License on the Production and Operating of Broadcasting and TV Programs, License on the Production of TV Dramas and License on the Distribution of TV Dramas shall be obtained.
- Approval of commercial performance and broker business
According to the Regulations on Commercial Performance (2005 No.439 Decree of the State Council) and Rules for the Implementation of the Regulations on Commercial Performance (2005 No.34 Decree of the Ministry of Culture), to file for a broker agency, there needs to be at least 3 professional brokers and corresponding fund, which is also subject to the approval of the provincial cultural authorities.
Based on the above regulations, the License on Commercial Performance shall be obtained before engaging in commercial or broker business.
In addition, if a film and TV company with License on Audio and Visual Programs of Online Information Communication wants to launch its IPO on the GEM stocks, it will need the check and approval of the provincial administration of press, publication, film and TV according to the Notice by the SARFT on Enhancing the Participation in Share Transfer of Small and Medium Sized Enterprises with the License of Online Audio and Visual Programs.
In conclusion, before filing for IPO, the film and TV company shall ensure that it has obtained the required license on operation, distribution and release.
Step 4: Properly handle relations with celebrities
The foray into the capital market by film stars is one of the heated topics in the financial and entertainment circles of 2016. It is common for celebrities to be shareholders of listed companies. In practice, attention shall be paid to the shareholding by celebrities and the transaction between listed business and the celebrities.
- Celebrities as shareholders of listed businesses
Attention shall be paid to the fairness of share price for them.
In February, 2008, H. Brothers introduced its film stars to invest in the company, including Huang Xiaoming, Zhang Hanyu and Hu Ke. In reference to the net profit of RMB 58,24 4,600 in 2007, the earnings per share after capital increase is approximately RMB 0.46. Based on the PE ratio of 6.4, the share was priced at RMB.3.00.
When Talent International Film Co. offered IPO, the share price for Fan bingbing, Zhao Wei and Zhang Fengyi was RMB 3.47, significantly lower than the share price for previous shareholders, which was RMB 6.45. Thus, it raised the attention of the regulators. The company believed these renowned actors and actresses had already signed contracts with it on performance and strategic cooperation, thus there could be some differences in the valuation of the company and between them and external investors. They can create considerable economic benefits for the production and operation of the listed company. However, the regulators were not easily convinced and required detailed explanation from the company. The company quoted these celebrities as: (1) compared with external investors, these renowned industry insiders can significantly enhance the popularity and influence of the company; thus, the share prices should be lowered for them; (2) they hope reference be made to the share price after capital increase of H. Brothers and Huace Film and TV in making the investment; (3) Several rounds of negotiation had been carried out between the company and these celebrities to prove that it was in line with the market principle.
- Business contact between the listed company and celebrities
When filling for IPO, attention should be paid to whether there is business transaction between the issuer and the listed company, the fairness of the transaction price as well as the existence of profit transfer to the issuer.
According to the No.1 Guideline on Information Disclosure of GEM Industry — Listed Companies Engaged in Broadcasting, TV and Film Businesses (Revised in 2016), strict requirements are set up on information disclosure for the cooperation between cast members and the listed company. For those with great influence in the company, prompt disclosure of information on cooperation pattern, terms of cooperation, schedule, scope of authorization and exclusive clauses. Risk assessment on the profitability or cooperation between the two sides shall be carried out considering the change of personal influence of the cast members or the restriction on them due to policies and laws and regulations.
The above is nothing new. Actually, when Talent International Film Co. went public, it fully disclosed the contracts and business contact with Fan, Zhao and Zhang. For example, it disclosed the main clauses of the contract signed between Fan Bingbing and Phoenix Agent Company, specifying the exclusive agency of TV dramas, non-exclusive agency of films and advertisement performance, advertising campaigns, and non-exclusive agency of other entertainment activities, as well the proportion of agency fees. According to these terms and arrangements, the company paid Fan RMB 52,747,300 for being the leading actress and producer of the TV drama, The Empress of China. According to the company, the clauses in the contract signed with Fan were in line with the industry practice, negotiated and decided by the related service provided to the artists by the listed company, as well as the quality of performance, popularity and market recognition of the artistes.
However, the securitization on the side of celebrities suffered huge setbacks in 2016. Among them, the deal of Baofeng Tech acquiring Straw Bear Film and TV Co. which Liu Shishi had 20% stake attracted great attention. In this deal, Liu would sell 12% of the stake; once the deal is closed, Liu can gain profit of RMB 216 million. However, the deal was vetoed by China Securities Regulatory Commission, for it was deemed that there was uncertainty concerning the sustainable profitability of the targeted company. In addition, Talent International Film Co. failed to acquire the Wuxi Aimeishen owned by Fan Bingbing through major assets restructuring and acquisition and change of cooperation plan.
As a public figure, they inevitably attract more attention on the road to the capital market. On the one hand, information disclosure must be ensured; on the other hand, there is no much difference between the share valuation of the celebrities and that of core management of the listed company. Thus, it cannot be over-stressed.
(The author is Senior Partner, Head of Capital Markets of Beijing Xing Quan Law Firm )