-By Andreas Fuchs

On May 20, 2012, Dalian Wanda Group Co., Ltd. and AMC Entertainment Holdings, Inc. announced a US$2.6 billion deal that created the world’s largest cinema exhibitor.

“This acquisition will help make Wanda a truly global cinema owner,” Wanda’s chairman and president, Wang Jianlin, noted at the time, “with theatres and technology that enhance the moviegoing experience for audiences in the world’s two largest movie markets.” In his speech delivered at the announcement, which is posted below in its entirety, Wang spoke of an “excellent investment” as well. “This is an important first step of our global expansion strategy as we continue [to] execute corporate strategy to capitalize market opportunities through cross-border development initiatives. This is also an important platform for our intent to expand in the U.S. in other sectors—for example, in commercial property development, hotels, retail or other activities.”

Four weeks later, Film Journal International had the opportunity for an in-depth conversation with Gerry Lopez, chief executive officer and president of AMC, about this milestone merger of movie theatres. On behalf of our readers, the author appreciates Mr. Lopez highlighting some of the background and items that he too finds to “have been ignored” by other reports.
 
While it had not been much of a secret that AMC’s investors were looking for a different owner, the ultimate buyer, as well as the quiet and expedient ways in which the deal was executed, was surprising in many respects. Back in June 2010, AMC Entertainment had filed for an IPO as a privately held company. “That essentially means the company is for sale, and that the private-equity owners would like an exit,” Lopez explains. “For strategic buyers in particular, meaning folks who already own theatres elsewhere, that’s kind of the radar alert.”

By that August, “we began to field a number of inquiries,” he continues. “There were many interested parties at that time, and one was the Wanda Group. During the months that followed, we met with them many times and they did some due diligence.” Negotiations “went quiet,” however, until the fall of 2011, when AMC and Wanda engaged in what he now describes as a more serious conversation. “While it was really triggered by our filing for the IPO, the process had many players come and go. At the end, one remained standing and that was Wanda.”

With the general perception that China is still defined by state regulations and government control, closing a deal of this size in about six months does not seem to have taken all that long. Indeed, Lopez confirms our assumptions about the spirit of entrepreneurship prevalent at Dalian Wanda. “They are not owned by the government and…they are not part of a government enterprise. While they are an integral part of the emerging private sector in China, Wanda Group is also personally owned by the chairman and his family. They are a private enterprise twice over, if you will. And they are a strategic buyer because they are already operating in the cinema business.”

Lopez calls Wanda’s business model “quite unusual in comparison to established practices in the United States.” Wanda owns and develops their own centers, which are called Wanda Plazas. “Those malls are anchored by a department store, a hotel and a cinema. They also have, of course, plenty of square footage for additional retail along with apartments and condos.” While this doesn’t sound all that much different, he notes how Dalian Wanda’s interests actually encompass the real estate along with the key businesses on it. Unlike traditional set-ups where anchor tenants such as Macy’s or Neiman Marcus would lease space, Wanda owns both the mall and the anchors.

“The chairman’s vision is to use that platform to become the biggest and the best in all of those areas—malls, cinemas, department stores and hotels. Once he has achieved that goal …he wants to branch out to other parts of the world with that same mission of becoming number one in the world in that particular arena. So with AMC, chairman Wang has achieved that goal exactly.”

Last year, Wanda became the number-one exhibitor in China, Lopez confirms. “So, the first step, if you wish, has been checked… And now, with a single transaction of buying AMC, Wanda advanced from being not just number one in China, but also to the number-one position in the entire world. The chairman’s vision of growing in the cinema arena has been achieved.”

The goals of AMC and its investors have been met as well. “Our intentions are to begin retiring some of the debt as we are delivering the company,” Lopez says. “In fact, there are some 8% notes that are outstanding that will be retired concurrent with the closing. The idea is to continue doing so in the years ahead when it becomes economically feasible,” he assures. “It has taken us ten years to build the debt load we have now. It’s not likely we can dismiss it all in ten days.”

Without getting “into a lot of the weeds,” Lopez cautions how this is a complicated process. “The bigger idea is, yes, we will begin delivering the company. That’s a fact that was recognized by the vote holders already and, subsequently, by Moody’s moving our rating up.” The second component, “beyond the equity investment in buying the company” and assumption of related debt, has Dalian Wanda making an additional investment of $500 million. “That money is primarily going to go towards accelerating the strategic initiatives that we already had in place at AMC,” he says.

Over the past two to three years, AMC has been very active in creating premium experiences in picture, sound, seating and accessibility (AMC Randhurst), as well as expanding food and beverage options, Lopez reminds us. Whereas the former includes large-format experiences such as IMAX and ETX, as well as “installing recliners and revamping some of our older locations into brand-new theatres,” the latter has “gone from what we call a concession refresh at one end to full in-theatre dining at the other” (http://bit.ly/fji0209forkscreen). “All of those initiatives require capital and we have a plan in place that allows us to touch every one of our buildings with some type of remodel over the next eight to nine years. That’s how long it would’ve taken us to get to all of our buildings. Now Wanda’s investment allows us to do that work in, let’s say, four years. We can accelerate the deployment that quickly,” he forecasts. “This is a huge win, frankly not just for AMC for the obvious reasons, but also for the entire industry.”

Remodels have brought upticks in attendance by virtue of new customers and increased frequency. Lopez cites about half a dozen buildings where, “within a matter of three, four weeks after the remodel, the attendance doubled.” Despite having lost 60 to 65% of seating capacity due to wider seating and more generous spacing, he adds. “A huge percentage of improved attendance does not derive from taking away market share from the competition, but from more people coming to the movies than before. If all we do is transfer attendance from our competitor to our building, well, that benefits AMC but not the studio. It’s still just one person buying a ticket. If we can get one extra person to attend, however, it’s a win for us and for the studio… Frankly speaking, we have not seen that improvement with digital conversion and we have not necessarily seen that with 3D either.” Lopez thinks the jury is still out on whether “3D is having a positive impact on total attendance. Yes, 3D is cool and we are charging a premium for the experience. But are there really more people coming because of 3D?” he wonders.

Offering more to more people, AMC has already greatly expanded its programming with AMC Independent and other audience-specific, targeted programs, that even include Chinese films in partnership with China Lion (FJI, June 2011). Not surprisingly, then, Lopez addresses changes in that programming under a different ownership culture, which were frequently mentioned as part of the deal reporting. “We have to look at those things independently,” he insists. “For us, what goes on the screen is all about what the customers want to see.” Said initiatives are “all about understanding who our audience is, building by building, and then programming to cater to their tastes and preferences.” AMC will be doing more of this “because, frankly, our marketing is getting better. As we welcome these audiences into our buildings and with help from our AMC Stubs loyalty program, we are getting to know them and their viewing patterns better.”

The impact on programming by Wanda, Lopez reassures, will be nil to none. “Our programming group alone determines what goes on the screen. They’re spending this Monday like they do every Monday, analyzing what played well, and what didn’t. We got a big weekend coming up and they need to make room in order for the new films to come in. This process goes unchanged, unadulterated and untouched.”

Looking in the other direction, will AMC bring changes and different ways of operating to Wanda Cinema Line in China? “We are definitely going to explore that,” Lopez believes, “but we don’t have any specific plans yet. To be perfectly honest, we haven’t had time to even begin to think about that. Obviously the fact that we run more than 340 theatres has given us some experience over the years. As the trade grows in China, I am certain there will be some best practices that we can begin exchanging.”

Two items that “immediately jump out” to him are our industry’s past of overbuilding and AMC’s previous initiatives at international expansion. “We’ve been through some of those growth spurts here in the U.S. Fifteen, 20 years ago, we were all putting up buildings left and right. When you go through that kind of rapid growth, you make some mistakes. AMC can certainly share those experiences.”

Secondly, chairman Wang made his intentions known that Wanda wants to continue expanding its cinema business into other countries and on other continents. “AMC has operated in South America, Europe and Asia,” Lopez contends. “We have on our staff people who are used to cross-border transaction and foreign exchange and who know what it takes to operate buildings in many parts of the world.” Although AMC sold those theatres over the years to concentrate on U.S. operations— with Canada being the latest to go—the same people are still with the company, he says. “They are doing other jobs now, but the ability to understand how to operate a multinational circuit resides within AMC. Chairman Wang has made a point early on, and he has continued to do so, that Wanda is buying not just the assets of AMC but also its management team to help develop and build a global footprint.”

Gaining that foreign expertise is a strategy pursued by mostly all of the Chinese enterprises looking for global impact, Lopez notes. “After all, the Chinese people have been capitalists for not even two decades,” he muses. “While they have been very successful—and Wanda is a prime example for that success—they did not have that much time to develop the necessary management depth.” Citing how Lenovo and Volvo, for instance, have benefitted from the investments by their Chinese owners, he feels AMC to be in good hands. “This is going to enable us to do things that we have been dreaming about. Accomplishing what we are already doing in half the time, that’s huge.” Being a “relatively young, yet very successful company,” Dalian Wanda, on the other hand, “can now tap into a company like AMC with that level of experience and expertise under its belt. They would’ve gotten there themselves eventually,” of course, but AMC brings that knowledge to the table immediately, with executives “who have been in the cinema business longer than Wanda has existed as a company.”

The merger is, of course, still predicated on obtaining official approval from the relevant authorities in both countries. Lopez cannot get into too much detail “because we want to make the announcement at the proper time,” he says. “The fact is that the approvals from the U.S. authorities are coming along, some already a little quicker than we first anticipated. In China, the approval process is a bit more complex.” While the United States requires federal and national agencies mostly, there are about a half-dozen institutions and authorities in China that need to be consulted. According to Wanda, China’s National Development and Reform Commission approved the merger report in March. Wanda will complete the merger procedures by winning their approvals and that of the Ministry of Commerce and the State Administration of Foreign Exchange, a company news release noted.

“Government is government. It doesn’t matter if it’s here or there, you just can’t rush it,” Lopez adds. “All is coming along on both sides, however, and we anticipate closing the deal sometime in September.” As this process “appears to be very much on track,” he adds that dealing with banks and bondholders is also moving along “exactly as anticipated.” AMC is “very pleased about having obtained many of the necessary waivers and consents to changes from some of our vote-holders. This is kind of like checking all the boxes, dotting the I’s and crossing your T’s,” he confirms. “All of those steps are coming along and progressing pretty nicely.”

With all this activity, has Lopez found any time to learn Chinese? “I have not,” he confirms, laughing. “Fortunately for me, my 20-year-old college sophomore took Chinese in high school. So I have at least one family member that is not scared by the language.” On a more serious note, learning is part of AMC’s corporate culture, he offers. “As part of our employee-benefit program, we have always supported people with tuition, not just for this language or any other language for that matter… That’s not going to change.” Addressing cultural aspects further, Lopez recalls the “good fortune” of working as president of Starbucks Global Consumer Products, Coffee and Foodservice. “Having done business internationally before and most recently at Starbucks, where we launched products into the Korean and Japanese, Taiwanese and Chinese markets, gave me a good, solid footing in terms of the culture of those countries. They are all Asian, but they are all different.” Lopez also credits his personal experience of arriving from a different culture to the United States as key to understanding the different ways of conducting businesses.

Continuing on that personal note, he finds this exchange stimulating and the trade-off exciting, particularly for theatrical exhibition. “It puts our industry at the forefront. Normally, we are not on the forefront of too many things that have happened in other industries.” For Lopez, this makes a very positive statement about the theatrical business, “which everybody is always too quick to denigrate. For once we have something that we can be proud of and nobody is talking about it. It is kind of sad, really.”

In closing, some personal words from this author are due. I couldn’t agree more with Gerry Lopez. Computers, cars and now cinemas. If anything, the Wanda-AMC deal shows the value and respect that filmed entertainment enjoys in the People’s Republic, not to mention the trust in our industry’s cultural and financial future. It is probably no coincidence that Dalian Wanda Group’s entertainment portfolio is listed under the heading of “Cultural Industries.” Even more revealing is the note about its own corporate culture. “Spiritual pursuit represents the highest level of human pursuit and cultural operation represents the highest level of corporate operation.” We can all be proud to be in that business.


In Their Own Words
Wanda Cinema Line is the top-ranked cinema circuit in Asia. It has 86 five-star cineplexes and 730 movie screens, of which 47 are IMAX screens, accounting for 15% share of the national box office. By 2015, the company plans to operate more than 200 cineplexes and own 2,000 movie screens, becoming one of the leading cinema circuits in the world.

Wanda is a private conglomerate, so far operating solely in China, with US$16.7 billion in annual revenue and $35 billion in assets, that focuses on five major areas, including commercial properties, luxury hotels, tourism investment, department stores and cultural industries. With more than $1.6 billion invested in cultural and entertainment activities since 2005, Wanda has become China’s largest enterprise investor in that sector.

AMC operates 346 multiplex theatres mostly located in major metropolitan markets in North America, and a total of 5,034 screens, including 2,336 3D screens and 128 IMAX screens, making it the world’s largest operator of IMAX screens. Approximately 200 million people watched movies in AMC theatres in 2011. Privately held, AMC’s ownership group includes Apollo Global Management, Bain Capital, the Carlyle Group, CCMP Capital Advisors and Spectrum Equity Investors. Upon closing of the transaction, AMC will become a wholly owned subsidiary of Wanda.
(Source: Corporate information, Wanda Dalian, AMC Entertainment.)

The View from Chairman Wang
“Wanda is proud to be China’s largest investor in cultural and entertainment assets. We know, however, that while our country is a rapidly growing market for movies, the U.S. is the largest market by far. It is also the most advanced in technology, management techniques, and creatively generating revenue and customer satisfaction through improved seating, better concessions and similar improvements. International expansion is a priority for Wanda, and movie theatres are important to our portfolio. So we want to enter the U.S. market, and AMC is the natural choice.

“We see our acquisition of AMC as an excellent investment on its own merits. This is an important first step of our global expansion strategy as we continue [to] execute corporate strategy to capitalize market opportunities through cross-border development initiatives. This is also an important platform for our intent to expand in the U.S. in other sectors—for example, in commercial property development, hotels, retail or other activities. All of these offer growth potential for Wanda, and with that comes the potential to create jobs and economic growth in the communities where we will operate.

“AMC is a clear leader in this industry. It has extensive experience, mature and efficient operating models, and advanced cinema technologies—especially their deep investment with IMAX, which is an important technology provider to Wanda as well. They have wisely located most of their theatres in areas with high traffic, attractive demographics and strong potential for growth. They have a brand that has passed the test of time, and stands for a high-quality moviegoing experience all across the U.S. By any measure—attendance rate, income, operations cash-flow before rent—we believe that AMC is the best performer. Perhaps most importantly, AMC has a management team that has rich experience in the cinema industry, and understands what it takes to be successful for the long term.

“A strong element in making this transaction work is the commitment of Gerry Lopez and his team to continue expanding on what they have built, now in partnership with Wanda. That is why we have entered into an employment agreement to retain the entire AMC management group. Wanda Cinema Line is the largest and leader in the industry in China. We look forward to partnering with them to build on the many strengths of AMC, and to leverage their experience to help replicate aspects of their operating model in high-growth markets such as China. So, this acquisition will benefit us in every market where we operate, now and in the future.

“We expect that our work together will ultimately create additional jobs and expanded opportunities for current AMC associates, as the company grows. I can’t be more specific now about these initiatives, but we have announced that we intend to invest up to an additional $500 million in AMC over time to fund AMC’s strategic and operating initiatives. With this scale of investment, you can see that we believe there is a very promising growth story for us in the U.S. and in China.

“Once our transaction has been granted final approval, our cinema business will cover the world’s two leading cinema markets. We can continue to consolidate AMC’s strong position in the European and American markets, while at the same time capitalizing on the enormous opportunities to grow here in China. The two markets will be mutually supportive.

“This transaction will make us the largest cinema owner in the world. Of course, size alone is not our goal. We will certainly be bringing entertainment to millions of people. I’m very confident that together with AMC we can make our theatres in China, the U.S. and elsewhere the best in the world.”
—Wang Jianlin, Chairman and President of Wanda, speaking about the announcement of Wanda Group’s acquisition of AMC Entertainment, May 21, 2012