As Huayi Brothers Eyes STX, Questions Surround the Proposed Marriage

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Robert Simonds, Wang Zhonglei

Details about the partnership between China's leading TV and film company and Bob Simonds' new Hollywood studio will be revealed during a shareholder meeting on April Fool's Day.

When it comes to striking a major deal with Hollywood, China's Huayi Brothers Media Corp. has been to the altar before — only to turn into something of a runaway bride. Given that, all of Hollywood — as well as rival companies in China — are watching with a skeptical eye to see if the leading TV and film company actually closes a deal to partner with Robert Simonds' STX Entertainment on 18 movies.

In 2013, a much-vaunted partnership between Huayi and Legendary Entertainment fell by the wayside, while last year, Huayi's deal to invest $100 million to $120 million in Jeff Robinov's Studio 8 likewise fell apart. Now, Huayi is trying again, filing regulatory papers in China earlier this week loosely describing a three-year deal with a secret partner that turned out to be STX.

Siblings Wang Zhongjun and Wang Zhonglei, who run Huayi, remain determined to establish a sizable foothold in the U.S. film business. To date, the company has invested in individual films like Sony's Fury and Lionsgate's John Wick and Mordtecai and has also set up a U.S. subsidiary. In China, there's rampant speculation about the scale of the STX deal, with some sources saying it could be as large as Lionsgate's new film financing deal with Hunan TV, which is worth $375 million over three years.

Launched last year, STX has ambitions to rival the major studios in terms of output, and it has amassed a stable of seasoned industry executives, including former Universal chairman Adam Fogelson and veteran marketing executive Oren Aviv, who did a long stint at Disney before joining Fox. Any actual deal with Huayi would allow the well-capitalized STX to move more quickly toward reaching its goals.

So far, STX won't confirm it is involved with the Wang brothers. But full details about the deal are expected to be revealed during a Huayi shareholders meeting on April 1 where the pact must be approved.

"More than ever before, there are a lot of companies with studio ambitions, whether STX, Legendary or Relativity, and there is a lot of money flowing in from these Chinese companies, as in hundreds of millions of dollars," says media analyst Eric Handler of MKM Partners. "Huayi and others want learn the craft and bring some of those best practices back to China. It's not going to be too long before China is as big a box-office market as North America, and this part of the growth process for Chinese investors."

Some are more skeptical. "It's yet another beautiful Chinese announcement, but it's just that: an announcement," says one top agent. "STX is doing great as they are. I don't think anyone is questioning their ability to finance films. The only thing they are questioning is whether they can release a movie successfully." (STX's first title, an untitled psychological thriller directed by Joel Edgerton, opens in theaters July 31.)

According to the regulatory statement filed with the Shenzhen Stock Exchange, Huayi will co-produce, co-finance and retain distribution rights to the movies in Greater China. Huayi would take a share of global revenues and profits. And it would become the first Chinese film company to hold the copyright to the co-produced films, according to the filing.

Beyond the financial questions that remain unanswered, observers also are questioning how Huayi's film needs mesh with the movies STX hopes to produce. Huayi's main interest is said to be generating content for its domestic market, where big action titles and family fare thrive. Sources say while Huayi likes the international dimension this deal would give the company, it is unlikely to be very interested in the projects that STX is currently working on such as the Civil War drama The Free State of Jones, starring Matthew McConaughey, or thriller The Secret in Their Eyes, starring Chiwetel Ejiofor, Nicole Kidman and Julia Roberts. "The movies now in the STX pipeline would do zero business in China," says another industry source.

Huayi Brothers saw its income from film decline 75 percent in the first nine months of last year, and the group has been focused on expanding other sectors, particularly online gaming and building cinemas. But financially, it is in a solid position. Last year it adjusted its private placement plan to raise up to $588.16 million, and tech giants Alibaba and Tencent bought a stake in the company and signed strategic deals on e-commerce, online entertainment and movie development.

Paving the way for a deal is the fact that STX already has ties to China, where it attracted Hony Capital as an equity investor. And Bill McGlashan, founder of TPG Growth, another STX backer, is a known sinophile, having lived in China for five years and done business there for 25 years since TPG was among the first U.S. private equity firms to operate there.

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