Is Ryan Kavanaugh's New China Deal for Real?

kavanaugh art - H 2019

The former indie player unveils a multifilm pact with a Hong Kong-based company — but where he's getting $250 million in financing remains a mystery.

On May?16, as Ryan Kavanaugh unveiled a new big-dollar fund that would get him back into the film production business, as well as a stake in a Chinese studio, dealmakers in Cannes were abuzz. Had the pitchman behind Relativity Media (which filed for bankruptcy in 2015) managed to pull off the impossible — getting money out of China at the height of a trade war — or was he simply spinning hype again?

Kavanaugh’s new company, Proxima Media, announced that it was teaming with National Arts Entertainment and Culture Group Ltd., a tourism and entertainment company based in Hong Kong that operates a film studio and resort destination in southern China. Proxima said the deal would provide $250 million in equity film financing, which could be leveraged to $1 billion, allowing it to produce an initial slate of up to 10 U.S. features at the Chinese studio site. Proxima would also “acquire a large stake” in National Arts, “taking over the management and building out” the studio.

Shortly before Proxima’s statement was released, however, National Arts Entertainment issued its own statement to the Hong Kong stock exchange, where the company is publicly traded. The Hong Kong disclosure frames the deal somewhat differently: Kavanaugh, 44, would be bringing capital to greater China, rather than the other way around, it said. Describing the pact as a “potential” agreement rather than a done deal, National Arts said Proxima will attempt to raise $100 million within the next nine months. If the funding is delivered, Proxima will be granted a 25 percent stake in the Hong Kong company, and a “designated party” — presumably Kavanaugh or a partner — will be paid a “success fee” of $3.5 million. Proxima will then “introduce” as many as five overseas films and three TV series, to be shot at the studio each year.

Many observers have noted the surprising timing of the Promixa's pact with National Arts, given the ongoing escalation of the U.S. China trade war, which has left most Los Angeles-Beijing industry players bracing for impact rather than plotting expansion. But geopolitics aside, it’s still unclear where Kavanaugh’s promised $250 million in production financing — as well as capital to fuel the studio’s expansion and enhancement into a world-class production base — would actually come from. 

National Arts currently has a market capitalization of just $194 million (HK$1.51 billion) on the Hong Kong stock exchange, and the company was carrying significant debt — liabilities of $280 million (HK$2.2 billion), compared with cash of just $1.7 million (HK$13.5 million) — as of the end of 2018. A share placement in March raised about $200 million (HK$1.6 billion), the bulk of which was used to pay down those debts. Kavanaugh's promised fundraising of $100 million, if delivered, would appear to be intended to pull the company back into the black. (National Arts also recorded a loss of $52 million in 2018, and $6.6 million in the first quarter of this year). 

Should the financing appear, it would still take significant time and development before National Arts is equipped to produce five to 10 major Hollywood films per year. Opened in 2015 in the southern Chinese city of Foshan, the company's film studio is currently smaller and less advanced than many other Chinese production bases, such as Beijing's Huairou Studios, or the Wanda-built Qingdao Movie Metropolis, which boasts over a dozen Pinewood-certified stages. In 2017, the local Guangdong government announced a plan to support film production in the region, but other Chinese provinces have competing initiatives in place — and the political calculus for trying to attract U.S. film activity appears to be shifting. 

The chatter in Cannes, where Kavanaugh once reigned as a financier, has been skeptical. During a panel discussion May?17, Mark Gill, president and CEO of Solstice Studios, echoed industry doubt about the former Relativity chief’s new venture: “Wherever the money is going to come from [in the future], it’s not China,” he said. “Every time anyone lies in Cannes, Ryan gets a royalty.”