Wanda Goes To Hollywood With Dolby
Following its landmark purchase of a major US theater chain last year, real estate giant Wanda has embarked on a spending spree to upgrade its new facilities with a major new deal to buy state-of-the-art sound systems from Dolby (NYSE: DLB). The move is the latest in a steady stream of big announcements over the last year that has suddenly thrust one of China’s top real estate companies onto the global stage, as it looks to become one of the world’s biggest theater chain operators. This new deal shows Wanda is likely to spend big money on its theater bet, which could well end with an IPO for either the theater business or perhaps for the entire company that is one of China’s best known names in real estate. But the movie theater business is notoriously difficult, despite its huge potential in China, and I suspect that Wanda’s movie theater drive will ultimately end in broken dreams.
Wanda is well known in China for its shopping malls and domestic theater chain, but more recently has moved into the spotlight with its moves on the world stage as it tries to build a global theater empire. It first made headlines a year ago when announced a deal to pay $2.6 billion for struggling AMC Entertainment, the second largest US theater chain operator. (previous post) Earlier this month, it was back in the news when media reported it was in talks to purchase a major theater chain operator in Europe. (English article)
This latest deal continues the stream of big headlines, and will see Wanda’s theater unit purchase state-of-the-art sound systems from Dolby, one of the biggest names in movie theater sound technology. (company announcement) Under the deal, Wanda will install Dolby Atmos systems on a series of giant screen theaters it is building both at home and abroad. The first of those screens, called X-Land, will debut in the Chinese city of Chongqing this summer, and at least 5 more will follow by the end of this year.
Wanda’s fast-growing theater empire now includes more than 100 locations in China, as it rapidly builds up its business in a film market that has grown rapidly to become the world’s second largest. Its AMC purchase last year gave it another 5,000 screens in the US. A European deal could be of similar size, meaning the company could quickly grow to a global giant with more than 10,000 screens. This Dolby deal looks like part of Wanda’s earlier promise to upgrade many of its theaters with cutting-edge equipment.
I certainly commend Wanda for its big theater bet, and also for its willingness to spend big money to upgrade its screens with big name partners like Dolby. But at the same time, the movie theater business is notoriously difficult and getting more challenging all the time with the rapid rise of DVDs and online and mobile viewing. Movie theater chains don’t usually make big money and even go bankrupt due to stiff competition and disadvantageous revenue-sharing agreements with filmmakers.
Wanda is clearly hoping its movie theater bet will quickly give it the scale it needs to bargain for better revenue sharing agreements, and also to get good deals from companies like Dolby to equip its theaters with cutting edge technology. I do like the fact that the company is willing to spend big money on its global expansion, which contrasts with other Chinese firms that are usually more obsessed with finding bargains. But at the end of the day, I would still only give Wanda’s theater gamble a 50 percent chance of success at best. Instead, I wouldn’t be surprised if this bet becomes a money pit that sees Wanda invest huge sums of cash with only modest returns.
Bottom line: Wanda’s attempt to build a global theater chain stands only a 50 percent chance of success due to stiff competition.
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