Viacom Weighs Majority Stake Sale of China Operations

Originally published: Sunday, January 13, 2019.

Media company is among other multinational corporations facing hurdles in the country

Viacom headquarters in Times Square in New York. Photo: Richard B. Levine/Zuma Press

Media giant Viacom Inc. is in talks to sell a majority stake in some of its China operations after running into difficulties trying to scale its business in the world’s second-largest economy, according to people familiar with the matter, reports The Wall Street Journal.

Viacom, which owns children’s entertainment network Nickelodeon, film studio Paramount Pictures, and music network MTV has operated in China for more than two decades. The New York-based company in the last few months has had discussions about a stake sale with at least one Chinese entity, the people said, adding that a deal may or may not materialize.

The talks follow similar divestments by large U.S. corporations including McDonald’s Corp. and Hewlett-Packard Co. in recent years. Other large multinational companies that have operated in China for years are also considering stake sales or even complete exits from their businesses in the country, according to investment bankers and advisers.

In the early 2000s, China was the land of opportunity for virtually every major multinational company. Banks and consulting firms raked in big fees coaching American companies on how to enter the country. Now, many are advising companies on how to exit or restructure their operations. Investment bankers at Morgan Stanley, JPMorgan Chase & Co. and some boutique firms in Asia are spending more time talking to companies rethinking their China strategies.

The Viacom talks have involved the potential sale of a majority share in its channel brands, such as Nickelodeon and MTV, in China, an arrangement similar to the company’s joint venture with Reliance Industries Ltd. in India. Viacom sold Reliance the majority stake in the venture last year.

Selling a controlling stake in its China business to a domestic investor could help Viacom reduce its potential regulatory risk in the country at a time of high trade and political tensions between Beijing and Washington, while still allowing it to profit.

Companies are finding they need to restructure as the promise of turbocharged Chinese growth dissipates, said Brent Carlson of consulting firm AlixPartners. Growth remains robust by global standards, and for many firms China is too big to ignore. But it can also be brutally competitive and fraught with regulatory hurdles. China’s trade conflict with the U.S. is also threatening to crimp American companies’ growth prospects in the country.

AlixPartners helped bring many companies to China over the past two decades. Now, Mr. Carlson said he has transformed his business to advise companies on pruning their operations.

Lian Lian, co-head of mergers and acquisitions for North Asia at JPMorgan, said the rise of dominant homegrown players, slowing economic growth in China and the development of e-commerce are prompting more multinational companies to assess their Chinese strategies.

She recently helped advise Dutch beer giant Heineken NV on selling its China business to the country’s largest brewer and taking a one-fifth stake in the buyer, China Resources Beer Holdings Co. China is the world’s largest beer market by volume, but Heineken had struggled to expand on its own despite having a business there since the 1980s.

Some foreign companies are concerned that a Chinese call for nationalism could dent their prospects. When McDonald’s in 2017 sold an 80% stake in its China operations to state-owned Citic Ltd. and U.S. private-equity firm Carlyle Group LP, the restaurant chain was shifting to a so-called asset-light structure to reduce its ownership of physical outlets. One consideration in the deal was the reputational risk of operating a U.S. company in China and the potential for negative consumer sentiment to affect its business, according to people familiar with the matter.

Industry participants say companies currently active in high-demand China sectors, such as semiconductor chips and other high technologies, could become obsolete as China builds out its own capabilities.

In the pharmaceutical industry, some companies that entered China on the back of a national reform policy to bring foreign expertise to the sector were crowded out of the market during the next round of policy changes. Among them was Dublin, Ohio-based Cardinal Health Inc., which in 2018 sold its Chinese pharmaceutical and medical-products distribution business for more than $1 billion to a local rival after facing challenges scaling up in the country.

Many large corporations are still growing and making money in China. The top 20 U.S. companies in the S&P 500 with the most sales in China reported $158.4 billion in China sales in 2017, according to The Wall Street Journal calculations, a figure that surpasses the $129.9 billion in goods China imports from the U.S. And in certain industries where regulations have been rolled back—such as financial services and automobiles—U.S. and foreign companies are still trying to expand in China, bankers and advisers say.

Viacom is working to build two Nickelodeon theme parks in Chinese cities that will feature cartoon characters including SpongeBob SquarePants and Dora the Explorer. Photo: Nickelodeon.

Viacom has long wanted to ramp up its presence in China. Since the mid-1990s, MTV has had a 24-hour Mandarin channel that features Chinese and international music, and in 2005 Viacom became the first foreign media company to take a 49% stake in a Chinese media company when Nickelodeon formed a joint venture with state-owned Shanghai Media Group to produce and broadcast children’s programs in the country. That deal has since lapsed.

Viacom executives for years spoke publicly about the immense growth opportunities presented by the country’s giant population, but tight regulations—such as government-imposed quotas on film distribution and foreign media companies’ access to broadcast television networks—have limited Viacom’s ability to expand. Paramount Pictures has been limited in the number and types of movies it can distribute on the mainland, though the company has achieved Chinese box office successes with films including Teenage Mutant Ninja Turtles and Transformers: Age of Extinction in recent years.

More recently, Viacom has struck deals to distribute music videos and TV shows on iQiyi Inc., an online-video platform controlled by search giant Baidu Inc. Viacom is also working with local organizations to build two Nickelodeon attractions in Chinese cities that will feature cartoon characters including SpongeBob SquarePants and Dora the Explorer - the Nickelodeon Cultural Resort in Foshan and a Nickelodeon theme park in the Mall of China.

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From Deadline:

Viacom In Talks To Sell Majority Stake In Its Chinese Operations – Report

Viacom is in talks to sell a majority stake of its Chinese operations.

The move, which was reported by the Wall Street Journal, would see the Hollywood studio sell a stake in its channels business, which includes MTV and Nickelodeon.

The newspaper reported that Viacom has already held talks with at least one unnamed Chinese entity after struggling to scale its businesses in the country, which has been a notoriously difficult market for international media and entertainment businesses.

Viacom may be using its recent experience in India as a blueprint for growth in China. In January 2018, Viacom sold a 1%, controlling stake in the business to TV18, backed by Mukesh Ambani’s Reliance Industries. Although the deal cedes control of the firm, which operates 42 channels and generates revenues of around $500M, it will allow it grow and take advantage of the Reliance firepower. Viacom CFO Wade Davis said that it did the Indian deal to “set the company up for its next wave of growth” and to take advantage of local distribution, particularly Reliance-affiliated Jio platform, one of the largest and fastest growing mobile, broadband and video distribution platforms in India.

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Also, from Variety:

Viacom Explores Sale of Majority Stake in Its China Channels

Viacom is exploring the sale of its majority stake in its TV channels in China, according to media reports Monday.

The media giant has held talks with at least one entity in China over the sale of stakes in channels such as MTV and Nickelodeon, the Wall Street Journal said. The newspaper, which was the first to report the move, did not name the potential buyer.

News of the talks comes as the U.S. and China become increasingly entrenched in the trade war that has soured relations between the nations over the past several months. Although a reduction in Viacom’s stakes would remove its control over its channels in China, bringing on a Chinese majority owner could help with navigating the country’s tricky political and regulatory environment.

Viacom sources told Variety that the company, under CEO Bob Bakish, remains committed to the Chinese market, whose mammoth size makes it impossible to ignore. Also, partnering up with a local enterprise is a model that Viacom has pursued elsewhere in Asia, including the region’s other billion-plus-population country, India. There, Viacom sold a stake in its joint venture, Viacom18, to its partner, TV18, last year, allowing TV18 to assume majority control.

Reports said that the talks in China center only on Viacom’s television operations and do not involve Paramount Pictures, whose “Transformers” spinoff, “Bumblebee,” is currently top of the box office in the Middle Kingdom.

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From The Hollywood Reporter:

Viacom in Talks to Sell Majority Stake in China TV Channels

A deal would bring Viacom’s China television brands business in line with its ownership structure elsewhere in Asia.

Viacom is considering selling off majority control of its Chinese TV operations.

The media giant has held talks with at least one interested Chinese entity, the Wall Street Journal was the first to report Monday. The talks have centered on a potential sale of Viacom's TV networks business in China, including MTV and Nickelodeon, sources with knowledge of the situation confirmed to The Hollywood Reporter.

The China operations of Paramount Pictures, also owned by Viacom, were not said to be involved in such discussions. Paramount's Transformers spinoff Bumblebee is currently leading the China box office with ticket sales totaling $106 million after two weekends.

The news comes amid a trade war and softer media industry growth in China than at any time in recent memory. The Journal's sources, who were not named, said Viacom has been frustrated by the difficulties in scaling its business in the world's most populous nation. A sale could also reduce the U.S. company's political exposure during a time of rising tensions between Beijing and Washington. Putting a Chinese entity in the driver's seat would provide a measure of regulatory security while allowing Viacom to still maintain some profits.

A deal in China also would bring Viacom’s business there in line with the structure pursued elsewhere in Asia, especially India. Viacom reduced its stake in its India joint venture, Viacom18, to a minority position in January 2018. Viacom’s Indian partner Reliance Industries upped its stake from 50 to 51 percent for $20 million, taking operational control of the company. Viacom also has a similar arrangement in place in South Korea, where its local partner, SBS, has majority control over the joint venture channels SBS MTV and Nickelodeon Korea.

Viacom, led by CEO Bob Bakish, has operated in China for more than 20 years. The company runs the 24-hour MTV Mandarin channel and Nickelodeon China with CCTV, as well as licenses a substantial amount of content to local streaming services like iQiyi. Viacom also has plans to build two Nickelodeon-branded theme parks in China with local partners.

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Also, from Financial Buzz:

Viacom Weighs Majority Stake Sale Of China Operations

Media giant Viacom Inc. (NASDAQ: VIAB) is in talks to sell a majority stake in some of its operations in China after running into difficulties trying to scale its business in the world’s second largest economy.

Viacom, which owns film studio Paramount Pictures, music network MTV and children’s entertainment network Nickelodeon, has operated in China for two decades. The New York-based Company in the last few months has had discussions about a stake sale with at least one Chinese entity.

The talks, which have involved the potential sale of a majority share in its channels brands in China, pose an arrangement similar to the Company’s joint venture with Reliance Industries Ltd. in India. Viacom sold Reliance the majority stake in the venture last year.

Selling a controlling stake in its China business to a domestic investor could help Viacom reduce its potential regulatory risk in the country at a time of high trade and political tensions between Beijing and Washington, while still allowing it to profit.

Viacom has long wanted to ramp up its presence in China. Since the mid-1990s, MTV has had a 24-hour Mandarin channel that features Chinese and international music, and in 2005 Viacom became the first foreign media Company to take a 49% stake in a Chinese media company when Nickelodeon formed a joint venture with state-owned Shanghai Media Group to produce and broadcast children’s programs in the country. That deal has since lapsed.

Viacom executives for years spoke publicly about the immense growth opportunities presented by the country’s giant population, but tight regulations—such as government-imposed quotas on film distribution and foreign media companies’ access to broadcast television networks—have limited Viacom’s ability to expand. Paramount Pictures has been limited in the number and types of movies it can distribute on the mainland, though the company has achieved Chinese box office successes with films including “Transformers: Age of Extinction” and “Teenage Mutant Ninja Turtles” in recent years.

The argument about China has always been about the growth potential of a 1.4 billion-strong market, but after almost 25 years of selling its TV brands in the country, Viacom’s revenue split is still overwhelmingly dominated by the U.S. and Europe. Even if it could gain market share, there’s the problem that advertising spending in the country as a whole is looking lackluster.

From a period in the early part of this decade when spending increased as much as 50% annually, it’s now failed to hit a double-digit growth rate in six years, according to GroupM, WPP Plc’s media agency. Spending still comes to some USD 90 Billion a year, but as a share of GDP it’s been trending down for more than a decade.

That dismal growth potential means it’s simply not worth the hassle of navigating China’s regulatory environment, with or without trade tensions. Chief Executive Officer Robert Bakish, a veteran of Viacom’s international operations, said at an investor conference last week, “It’s China, it’s a little bit of a can of worms.”

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Also, from Bloomberg:

SpongeBob and the Sinking of Viacom’s China Dream

Don’t blame the trade war: Byzantine rules and slowing growth had already thwarted the U.S. media giant’s TV ambitions.

There’s no money in getting Chinese viewers hooked on MTV and Nickelodeon.

That’s certainly the impression you’d get from Viacom Inc.’s apparent decision to sell its majority stakes in its Chinese TV channel brands. The media company has held talks with at least one Chinese entity about selling the businesses, a person familiar with the matter told Nabila Ahmed of Bloomberg News. The Wall Street Journal had earlier reported the potential deal.

It’s tempting to regard this as a casualty of the U.S.-China trade war, with heightened tensions seriously reducing the attraction of selling SpongeBob SquarePants and Beyonce to a Chinese audience — but in truth, the current spat is at best the last straw. While Viacom still sees significant potential in China’s film industry, television has been struggling for years.

Television is the bulk of Viacom’s business globally, making up about three-quarters of revenue and, in recent years, more than 100 percent of operating income thanks to losses from its Paramount film studio. In China, the script is reversed. Almost all the potential lies in getting a blockbuster picture like “Transformers” or “Teenage Mutant Ninja Turtles” past Beijing’s cinema censors and onto the limited quota of Hollywood films granted release. Television looks like a distinct also-ran.

The problem in China’s television market is roughly the same as in the U.S. The world’s second-biggest media market is dominated these days by a handful of online players. About two-thirds of advertising yuan are spent on digital, according to eMarketer. Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd. carve up about 80 percent of that sum, in much the same way that Facebook Inc. and Alphabet Inc.’s Google do elsewhere.

Combined with the vast proliferation of television channels is the fact that Viacom’s youth-oriented brands are barely distributed on the pocket-sized screens on which young Chinese, especially in urban areas, get most of their media content. Until last year, there was no non-TV outlet for MTV’s content in China at all, and Nickelodeon has similarly been busy signing up agreements with local distributors to get its content on streaming platforms.

The argument about China has always been about the growth potential of a 1.4 billion-strong market, but after almost 25 years of selling its TV brands in the country, Viacom’s revenue split is still overwhelmingly dominated by the U.S. and Europe. Even if it could gain market share, there’s the problem that advertising spending in the country as a whole is looking lackluster.

From a period in the early part of this decade when spending increased as much as 50 percent annually, it’s now failed to hit a double-digit growth rate in six years, according to GroupM, WPP Plc’s media agency. Spending still comes to some $90 billion a year, but as a share of GDP it’s been trending down for more than a decade.

That dismal growth potential means it’s simply not worth the hassle of navigating China’s byzantine regulatory environment, with or without trade tensions.

Chief Executive Officer Robert Bakish, a veteran of Viacom’s international operations, knows that as well as anyone. Asked about the potential for international audience growth at an investor conference last week, he pointedly left it out of his generally optimistic analysis. “It’s China, it’s a little bit of a can of worms,” he added. You can say that again.

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