Just back from Los Angeles, where I met with countless people in the movie industry and discussed with nearly all of them how Chinese entertainment companies are and will be buying into Western entertainment companies, and vice-versa. In just the past week, we are hearing of Wanda (China) looking to buy into AMC Entertainment (U.S.) and News Corporation (Rupert Murdoch’s company) having just announced that it will be buying approximately 20% of Bona Film Group, a China-based movie distributor and producer.
And that is where things get complicated.
As soon as I heard about the Bona film deal, my legal cap went on and I wondered it would be accomplishing that when, technically, foreign companies generally are not allowed to own a piece of a Chinese company, which would be even more true (if it needed to be) of a company in a sensitive industry like the China film business. So I did a quick Google search that immediately confirmed my suspicions. Bona Film Group is not technically a Chinese company; it is a Cayman Islands holding company that lists on NASDAQ. Variable Interest Entity (VIE), I immediately thought.
So I did some more research and discovered that China Hearsay has already done a fine post on all of this, entitled, “News Corp Purchases Stake in Bona Film Group: Just What Are They Buying Into?” In its post, China Hearsay sets out exactly how this deal can be realized and the risks/uncertainties in a deal like this, involving as it does VIEs. China Hearsay does a great job analyzing the relevant portions of Bona Film Group’s disclosures regarding VIEs and concludes that Bona did a better job than most in terms of explaining the risks. I agree and so I recommend this China Hearsay post to those who want to know (or should want to know) the risks of investing in companies that operate through VIEs.
Bottom Line: We foresee many more such entertainment deals in the next year involving VIEs, so get used to it.