Monday’s announcement that Dalian Wanda is to sell off about $9 billion of theme park and hotel assets to Sunac China caught many observers by surprise, as Wanda had given no indications that it wanted to unload these big-ticket attractions, or location-based entertainment assets, as the current jargon has it.
But the scale of Wanda’s debts and mounting regulatory scrutiny of the giant real estate and entertainment conglomerate may be factors behind the deal.
As that scrutiny increases, all assumptions about Wanda are being questioned, even whether chairman Wang Jianlin is, as Chinese media outlets routinely describe him, China’s richest or second-richest businessman. Wang’s wealth is hard to calculate as Dalian Wanda is a privately owned holding company that sits atop the sprawl of companies and operations that bear the Wanda brand. Only some are publicly listed.
The parks and hotels sale agreement looks like both a fire sale and a smart move. Here are five possible reasons for Wanda to enter such a deal:
Just last month, Dalian Wanda announced that its first half-year revenues were up by 12% to an unaudited 135 billion yuan ($19.6 billion). It said that its asset base was up 20% compared with a year earlier, to $128 billion. At the end of December, it reported assets of $111 billion. But it has always been unclear how much of that total was leveraged on borrowings from banks and China’s shadow banking sector.
In financial circles, there has long been suggestion that Wanda’s debt levels are enormous. Wang flatly denied that on Monday and said that the disposals will largely repair the group’s balance sheet.
“Through this transfer of assets, our debt ratio will go down sharply. This recoupment of funds will all be used to pay off loans, and Wanda plans to pay off most of its bank loans by the end of this year,” he told the Chinese financial journal Caixin.
That would dampen some of the turbulence that has recently buffeted Wanda, as seen in the volatility in the share prices of its listed units. Barely two weeks ago, Shenzhen-listed Wanda Film Holding was rocked by market chatter suggesting that Wang was falling out of political favor and that state-owned banks were unloading their holdings. Wanda denied that as a malicious rumor. Monday’s deal with Sunac lifted Wanda Hotel Development stock by 47% in Hong Kong.
2. Regulatory risk
A day after Wanda Film shares were rocked, it emerged that financial regulators had been ordered to check the health of their loans to a clutch of China’s most aggressively acquisitive companies. These included insurer Anbang; airlines to property group HNA; Fosun, the conglomerate that backed Jeff Robinov’s Studio 8; and Wanda.
No wrongdoing has been alleged or found. But, like the capital-control measures announced in December, the move once again targeted those companies that had become most prominent in overseas takeover deals.
(Sunac, which itself is on an acquisition spree, may be exempt because its takeover targets have been largely within Chinese borders. Indeed, with parts of the troubled LeEco group in its sights, Sunac may be becoming a government-approved buyer of distressed assets.)
The probes, while apparently inconclusive, are further warnings that even politically connected Wanda is not immune from scrutiny in the era of Chinese President Xi Jinping. And they represent a clear reminder that all private sector companies in China operate under the grace of the Communist Party.
Nor is it the first time that regulators have stepped in. Prior to Wanda Cinema Line’s IPO, regulators stalled the flotation for several months due to a lack of clarity in the paperwork. And last year, after the headline-grabbing acquisition of Legendary Entertainment, financial regulators again halted plans to syndicate the purchase.
3. Cleaning house prior to another spinoff
Even if Wang is right and the group’s net debt is not overwhelming, Wanda may still be having some local difficulties. Caixin points to the potential failure of Dalian Wanda’s plan to buy up the Hong Kong-traded Wanda Commercial Properties unit, valued at $5 billion, and relist it on a mainland exchange, where investors are expected to give it a higher rating. If that is true, then the parks and hotels sale to Sunac represents a neat way of keeping borrowings within limits while honoring Wanda’s guarantees to the buyout’s co-financiers.
4. Acceleration of Wanda’s “asset-light” strategy
Wanda’s decision to re-orient its balance sheet is not a new strategy. Having built and owned shopping malls, offices and hotel infrastructure throughout its first 15 years, Wanda began a few years ago to calculate that its capital could go further if it did not own so much of each project. It cut the cost of its property plays, and moved into faster-growing, less capital-intensive business sectors, such as entertainment and tourism.
The asset-light strategy and the reshaping of the group into a services conglomerate were formally announced in September 2015.
Thus far, Wanda’s entertainment and sports strategy has shown little sign that the group has shed its affinity for big-ticket acquisitions, or real estate. The Legendary purchase was announced as costing up to $3.5 billion, the Odeon-UCI and Nordic Cinema acquisitions were in the region of $1 billion each, and the failed bid to buy Dick Clark Productions would’ve cost another $1 billion. Meanwhile, Wanda is also building a $3 billion retail and entertainment complex on the outskirts of Paris.
The disposal of the 13 Wanda Cultural Tourism City parks and the 76 hotels (not Wanda’s entire hotel portfolio) may be the clearest manifestation yet of the asset-light strategy. While Sunac gets to own the parks (through an asset transfer and the assumption of their debt) and the hotels (through a $4.7 billion purchase), both the parks and hotels will remain Wanda-branded, and Wanda will earn management fees. That is a business model reminiscent of many of the world’s leading hotel groups, which leave the real-estate ownership to others while providing services and network benefits under contract in return for fees and revenue shares.
5. Competition from Disney
China is engaged in a theme park building boom. Local operators including Fantawild, Huayi and DMG are all building location-based entertainment facilities that will compete against the parks currently being hatched by foreign conglomerates Merlin, Six Flags, Universal, Fox and Disney. All are chasing the hundreds of millions of newly minted urban middle-class Chinese with disposable income and a taste for travel and novelty.
In the runup to the opening of Shanghai Disneyland in June 2016, Wanda’s Wang used a China Central Television interview to heap scorn upon Disney. He accused it of being overpriced and irrelevant to Chinese consumers, who would favor local content over foreign intellectual property. Wang said that his “wolf pack” of Chinese parks would devour Mickey and Minnie.
Shortly after that interview, one of Wanda’s parks was accused of plagiarizing Disney characters, and Wanda’s Wuhan installation, once touted as the world’s first indoor theme park, has since been closed for a complete overhaul.
Shanghai Disneyland, on the other hand, has sailed on serenely despite choppy waters. At its one-year anniversary party, Disney revealed that it had beaten even its own forecasts by welcoming 11 million visitors in its first 12 months. Wanda may have woken up and smelled the Magic Kingdom’s coffee.
By Patrick Frater