Global Road's Implosion Sparks New China Money Fears for Hollywood

Executive Suite - Donald Tang - Photographed by Sam Frost - H 2017
Photographed by Sam Frost

The studio's flops and flameout have insiders concerned that prospects for future capital flow will only dim.

The swift collapse of Donald Tang's Global Road Entertainment — from grand hype to bankruptcy in less than a year — is the latest blow to the deteriorating relationship between Hollywood and China.

Tang, a former chairman at Bear Stearns Asia, launched Global Road in October with bold claims of leveraging his cross-border dealmaking skills to bridge the world's two largest movie markets. The company's U.S. film operations were seized by creditors in August, with mass layoffs following. The other shoe finally dropped on Sept. 6, with Global Road's film division filing for Chapter 11 bankruptcy. Tang's many backers and pedigreed staffers on both sides of the Pacific — from Chinese internet giant Tencent to venture capital impresario Neil Shen — may be feeling burned.

There is now widespread concern that Tang's flameout could impact the prospects for future capital flow between Beijing and Tinseltown — already mutually suspicious of one another, but also more interdependent by the day. The fallout, fairly or not, also has cast a cloud over the other U.S. mini-studios that were founded with the help of generous start-up capital from China in recent years: Bob Simonds' STX Entertainment and Jeff Robinov's Studio 8.

Although at very different stages in their development (STX has released 22 films; Studio 8 just two), both companies have been trying to secure additional investment commitments from China since April; and both have made support in the Middle Kingdom an integral part of their pitch. "Their challenge, like any film studio going to China for fundraising now, will be to somehow make it clear to potential investors that Global Road has nothing to do with them," says Stanley Rosen, a professor at USC who specializes in the Chinese film industry. "But these high-profile Chinese backers are going to be extremely cautious."

To be sure, STX is by now a much more established studio than Global Road ever became. The company has 14 films slated for 2019, as well as two co-productions in development with Tencent and four more with Jack Ma's Alibaba Pictures. 

Founded in 2014, STX has targeted a perceived opportunity in star-driven, midbudget moviemaking — which the major studios have turned away from — while also positioning itself to tap into China's growing pool of investment capital and fast-expanding box office. None other than Tang himself helped the company broker a major 18-picture slate investment from Chinese studio Huayi Brothers Media in 2015 (that deal recently ran its course), and the company also landed an array of high-profile Chinese equity investors — Tencent, Hony Capital, and Hong Kong's PCCW — along with blue chip backers in the West like Liberty Global, TPG Capital and others.

In April, STX submitted preliminary paperwork for a long-planned initial public offering on the Hong Kong Stock Exchange. Executives from the company spent much of the summer on a road show trying to line up investors for the eventual listing. The Hong Kong market, meanwhile, although previously red-hot, has hit a rough patch in recent months as several top-ticket tech listings underperformed and concerns continue to mount over Donald Trump's trade war with China.

If the IPO goes forward, it is expected to yield about $500 million in growth capital. If market conditions persist, or worsen, the funk could prompt STX to reconsider its plans. In that case, the company might need to raise additional private funds to move forward with its ambitions for expansion.

In a prospectus filed with the Hong Kong exchange in April, STX reported that it had $100 million in cash on hand, and much more available via a credit facility. But the filing also stated that the company has incurred losses every year since its founding, including a gross losses of $28.1 million in 2017. STX's two most recent releases, coming after a string of modestly positive performers, bombed: Melissa McCarthy’s Happytime Murders has earned $18 million since its release on Aug. 24 against a production budget of $40 million, while the Mark Wahlberg's Mile 22 has brought in $33 million domestically from a $50 million budget (STX contends it offsets such loses with aggressive foreign presales and output deals).

Prospective China investors are likely to pay more attention to the signals from Chinese regulators than the performance of particular projects, however. 

"Since the start of last year, Beijing has made it clear that capital from China will be focused on investment into core strategic sectors, with state owned enterprises taking the lead," says Jonathan Garrison, a former Goldman Sachs vp and current CEO of the boutique Beijing investment consultancy EnRoute Global. "The obtaining of approval for investment into foreign content-related industries is a lot more challenging now."

The growing perception in Beijing that many past Chinese investors in the U.S. movie business were taken for a ride — from Dalian Wanda Group's pricey $3.5 billion acquisition of Legendary to Tencent's current embarrassments with Global Road — has also taken a lot of the shine off Tinsel Town, Garrison adds. "The risks of investing in the movie business is better grasped within the market here now," he says.

Tang's inability to raise enough funds to weather Global Road's widely anticipated early growing pains would appear a bad bellwether for current investor appetite. And the loss of face Global Road's rapid failure has caused for its Chinese supporters, who extended undisclosed sums of seed capital as well as their reputations — including Tencent, Huayi Brothers, China Media Capital Partners and China Everbright — can hardly be expected to improve general sentiment. 

Robinov's Studio 8 is likely facing some of the same fundraising headwinds. Founded in 2014 with $250 million in financing from Chinese conglomerate Fosun Group, Studio 8 has gotten off to a far slower start than it initially promised, releasing just two films in four years while taking on the usual costly Hollywood overhead. The company had the bad luck of backing a rare misfire from Ang Lee as its first project — Billy Lynn's Long Halftime Walk (2016), which earned $30.9 million on a budget of $40 million — and Alpha, its second feature, opened to a soft $10.3 million in North America despite strong reviews.

In April, Studio 8 and Fosun said they were working with boutique investment bank The Raine Group to raise $200 million in equity investment. A spokesperson for Fosun's film division tells THR the effort was "going very well," but declined to elaborate. 

Fosun, whose vast portfolio includes ownership of Club Med and myriad Chinese medical and fashion holdings, declined to say whether it would seek to extend Studio 8 additional financing should it become necessary (the studio's third feature, the crime drama White Boy Rick, starring Matthew McConaughey, opens Sept. 14).

In any case, Studio 8 will be looking to China for a lifeline. Alpha, a prehistoric adventure directed by Albert Hughes and starring Kodi Smit-McPhee, opens in the Middle Kingdom on Sept. 7, and with the film having earned just $30 million worldwide, China's moviegoers represent the title's last hope of landing in the black.

So far, though, signs suggest Fosun still has Robinov's back. On Aug. 28, the conglomerate held its annual interim meeting in Hong Kong, where it posted record half-year results, with profits up 17 percent. At the event, Fosun played Alpha's trailer on a loop and passed out Alpha iPhone cases to attendees. Fosun's billionaire chairman Guo Guangchang later concluded his speech by urging the crowd to "go see Alpha."

A version of this story also appears in the Sept. 5 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.