A big bet: A detailed analysis of the 2.3 billion "bet" between LeEco and "The Great Wall"

Two years after Coming Home, director Zhang Yimou returns with the magical masterpiece The Great Wall! This is a Hollywood industrial film of great size, with investment from Legendary Pictures (acquired by Wanda), Universal Pictures, China Film Group, LeTV Pictures, etc., and a production cost of over 1 billion yuan. Since its premiere on December 16, The Great Wall has an overwhelming advantage in the cinema schedule, almost twice the schedule rate of Huayi Brothers' blockbuster The Wasted Time in the same period.

▲Poster of The Great Wall

As of 17:00, the box office of "The Great Wall" exceeded 400 million yuan in three days, and the speed of earning money is phenomenal. However, the evaluation of "The Great Wall" is polarized, and some reviews even angered the film company. Zhang Zhao, CEO of LeTV Pictures, tore up two self-media film critics on Weibo on the day of the premiere of "The Great Wall", and LeTV Pictures even issued a warning letter.

Isn't it just a film critic's review? Why is LeTV Pictures so angry?

1. A war of words triggered by film reviews

On the first day of the release of The Great Wall, the media and social media platforms went wild. The most notable thing was that LeTV Pictures CEO Zhang Zhao was furious! Within a day, Zhang Zhao tore up two self-media film critics on Weibo, including the famous "Poison Tongue Movie" in the film review circle, all because the critics gave a bad review to The Great Wall.

Not only that, LeTV Pictures also sent a warning letter to Sina Weibo celebrity @堕堕电影.

Since the release of "The Great Wall", word of mouth has been polarized, and some negative reviews have even criticized it completely. Douban Movie Rating 5.3 points, Time.com 7.3 points, its quality seems to be difficult to satisfy many movie fans. In response to the negative reviews, Zhang Yimou has also become a little impatient. Zhang Yimou's wife Chen Ting also twice protested her husband on Weibo, "How can everyone punish a movie director?"

▲The Great Wall did not pass the rating on Douban

However, despite the constant criticism, The Great Wall is still one of the strongest blockbusters this year in terms of box office performance. The box office was 50 million in 4 hours of advance screening, and exceeded 100 million in half a day of the premiere. As of 17:00 today, the box office has exceeded 400 million!

The box office of "The Great Wall" is crucial to LeTV Pictures, as it is one of the most important factors in boosting its performance this year.

In the plan for LeTV to acquire LeTV Pictures, it was disclosed that LeTV Pictures had invested in and released films that were scheduled to be released in 2016.

Among them, 7 films have been released, achieving a box office of 2.55 billion yuan (Note: The Great Wall is calculated based on the current box office of 400 million yuan). The Lost Tomb, Jue Ji and The Great Wall are blockbusters and are also the key to getting box office. Although The Lost Tomb became the only film to reach 1 billion yuan in the summer season, according to the Chinese film box office sharing ratio, the film company can share about 400 million yuan. However, LeTV Pictures is not the main investor of The Lost Tomb. As of December 31, 2015, LeTV Pictures' advance payment to The Lost Tomb was 46.9 million yuan.

However, the cumulative box office of "Legend of Zu" released during the National Day holiday was only 380 million yuan, and the film company was able to get about 150 million yuan. However, according to reports, the production cost of this film exceeded 150 million yuan, and the publicity and distribution costs of a film of this size are between 30 million and 50 million yuan. Therefore, many media believe that LeTV Pictures' investment in "Legend of Zu" is actually a loss.

▲Still from The Great Wall

This year, LeTV Pictures must count on The Great Wall. This is a blockbuster with global distribution, and it is also Zhang Yimou's first attempt at a global commercial blockbuster. The total investment is over 1 billion yuan. According to the convention that the box office must be three times the cost to make a profit, not counting the cost of publicity and distribution, this film needs to reach 3 billion yuan in the global box office, and the Chinese market is crucial.

As of December 31, 2015, LeEco Pictures disclosed that the advance payment for The Great Wall was RMB 120 million, which is almost 10% of the total investment. However, LeEco Pictures was not the main investor of The Great Wall, the main investor was Legendary Pictures, which was acquired by Wanda.

However, with the exposure of "Jade Dynasty" losing money and "Grave Robbers' Chronicles" not having a high share, it is not difficult to understand why LeTV Pictures relies on the box office of "The Great Wall". In addition, for LeTV Pictures, "The Great Wall" is not just about box office numbers, it is also a bold attempt by LeTV Pictures to develop a global film ecosystem after it tied up with Zhang Yimou.

According to a previous announcement by LeTV, Zhang Yimou serves as the artistic director of LeTV Pictures and has directed no less than five films in exclusive collaboration with LeTV Pictures. LeTV Pictures has exclusive priority investment rights and exclusive distribution rights for the above-mentioned films and all films directed by Zhang Yimou within five years from May 17, 2013 to the date when LeTV Pictures is successfully listed (IPO or acquired by a listed company).

▲Still from The Great Wall

2. A 2.3 billion yuan gamble and a 14.8 billion yuan business

Behind the box office of many movies are actually thrilling "gambling games" and big businesses worth billions or even tens of billions. In the case of LeTV Pictures, the wealth behind the movie box office is obviously even more grand.

On May 6 this year, LeTV announced that it planned to acquire 100% of LeTV Pictures for 9.8 billion yuan. It is worth noting that as of December 31, 2015, the net assets of LeTV Pictures were 2.108 billion yuan, which was only 21% of its transaction price.

According to LeTV's announcement, the assessed appreciation rate of LeTV Pictures was as high as 367%, and "the main reason for the assessed appreciation was the strong profitability of the assessed object."

However, LeTV Pictures' "strong profitability" is not reflected in its historical performance. In 2014 and 2015, LeTV Pictures' net profit attributable to the parent company was a loss of 891 million yuan and 102 million yuan respectively; considering the huge management fee expenditure caused by the payment of shares, its net profit attributable to the parent company after deducting non-recurring items was 64.45 million yuan and 130 million yuan respectively in the same period.

▲LeTV Pictures performance

The key factor that guarantees the high valuation of LeEco Pictures lies in a performance commitment (commonly referred to as a "betting agreement" in the industry) - LeEco Holdings, Zhang Zhao, Ji Xiaoqing, Lepu Yingtian, and Lezheng Rongtong promised that from 2016 to 2018, the net profit attributable to the parent company's shareholders of LeEco Pictures after deducting non-recurring gains and losses would not be less than 520 million yuan, 730 million yuan, and 1.04 billion yuan respectively. In three years, the total was 2.29 billion yuan.

It is worth noting that Zhang Zhao is the CEO of LeTV Pictures, who was the one who started to tear apart the critic of The Great Wall. He holds 3.8291% of LeTV Pictures' shares, which are worth 375 million yuan at the transaction price of 9.8 billion yuan. However, if LeTV Pictures fails to achieve the above performance targets, Zhang Zhao will need to make corresponding compensation.

▲Still from The Great Wall

LeTV Pictures' injection into the listed company LeTV.com still needs to overcome one most critical obstacle: LeTV.com's stock price.

LeTV Pictures was sold for 9.8 billion yuan, but only 30.4% (2.98 billion yuan) was paid in cash, and nearly 70% (6.82 billion yuan) was paid in LeTV's stock price. Even for the cash payment, LeTV still had difficulty relying on its own funds, because LeTV's capital chain has been in a tight state. As of the end of last year, its debt-to-asset ratio was as high as 77.53%, while the average level of listed media companies was 36.34%.

In order to solve the problem of capital shortage, LeTV decided to raise 5 billion yuan of supporting funds, which actually turned LeTV's major asset restructuring into a huge transaction of 14.8 billion yuan (9.8 billion + 5 billion). LeTV arranged the raised funds as follows: 2.98 billion yuan was used to pay the above cash consideration, and 720 million yuan was used to supplement LeTV's own working capital.

To pay for LeTV Pictures, LeEco.com paid its own shares at 41.37 yuan per share, which can also be seen as the entry price for existing shareholders of LeTV Pictures; the share price for LeEco.com to raise supporting funds was even higher, at 52.84 yuan per share. When LeEco set this price (announced on May 8), LeEco.com's share price was still around 58 yuan; but after the resumption of trading, LeEco.com's share price has been trending downward, with the latest share price being only 35.80 yuan.

Whether it is the shareholders of LeTV Pictures or the investors who are preparing to participate in the private placement of LeTV.com, who will be willing to subscribe for LeTV shares at a price far higher than the market price? This is undoubtedly a major test for LeTV.

▲LeTV stock price trend chart since December last year

It is worth noting that according to LeTV’s latest announcement: the parties to the transaction are discussing the valuation and pricing of this major asset reorganization. The company will renegotiate the transaction price of this reorganization with the counterparty based on the new asset appraisal results, and reconvene the board of directors to review this major asset reorganization. The announcement date of the board of directors’ resolution will be used as the pricing base date for the issuance of shares.

This announcement revealed two important pieces of information. One is that the valuation of LeTV Pictures needs to be adjusted; the other is that the pricing base date needs to be adjusted - which means that the issue price of LeTV.com may be significantly reduced.

The initiative to adjust the issue price is in the hands of LeTV itself, but the same cannot be said for adjusting the valuation of LeTV Pictures, because the shareholders of LeTV Pictures include too many celebrities in the film and television industry, including first-line directors Zhang Yimou and Guo Jingming, as well as popular movie stars such as Sun Honglei, Huang Xiaoming, Li Xiaolu and Sun Li. Moreover, the share prices of these stars are not low at all.

On September 29, 2015, Sun Li Studio invested 20 million yuan, Sun Honglei invested 20 million yuan, Li Xiaolu invested 5 million yuan, and Huang Xiaoming invested 5 million yuan to subscribe for LeTV Pictures shares. Based on their investment prices at the time, LeTV Pictures was valued at 6.975 billion yuan. In other words, no matter how LeTV Pictures' valuation is adjusted, it is unlikely to be lower than 6.975 billion yuan, otherwise how can these stars make money?

Although "The Great Wall" is just one of the many films produced by LeTV Pictures, at this sensitive time when the capital chain of the entire LeTV Group is tight and it is in urgent need of revitalizing its financing function, every step of LeTV is bound to be the focus of everyone's attention.

Walking on thin ice, every important link must not fall through - this may be the best description of LeTV's current state.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.