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Legendary East details ambitious plans

Legendary East details ambitious plans

By Patrick Frater

Thu, 17 November 2011, 13:10 PM (HKT)

Finance Feature

Legendary East Ltd 傳奇東方 this week revealed its first three production and investment titles as shareholders in Hong Kong-listed civil engineering group Paul Y. Engineering 保華建業集團有限公司 unanimously approved a $220.5 million investment in the new company.

PYE pulled back the curtain on a complex web of financing and production minutiae behind the ambitious trans-Pacific deal.

They highlight the very substantial financial, logistical and releasing commitments that China's leading private sector film studio Huayi Brothers Media Corporation 華誼兄弟傳媒股份有限公司 must make to the new venture.

The establishment of Legendary East was first revealed in June. PYE's massive financial commitment was subsequently announced in August with somewhat different equity participations. The now approved structure sees PYE hold a 50% stake in Legendary East, Legendary take a 40.1% holding and China's Huayi the remaining 9.9% in Legendary East.

PYE's shareholder approval for the deal now triggers a rights issue by PYE and the spinning of its construction and property operations into a separate subsidiary company.

PYE's directors made it clear that they do not pretend to know much about the film industry and explained that they had spent several years searching for a more profitable business sector to diversify into. They suggested that film is a higher performing and anti-cyclical investment.

The PYE board insisted that Legendary East is not a Chinese film company. Rather Legendary East is a Hong Kong vehicle for leading Hollywood producer Legendary Pictures LLC to make Chinese co-production films.

"Many people think that Legendary East is a Chinese film-maker. No. We only produce films in English, based on Chinese culture, mythology and history, with a view on distributing globally, meaning the US domestic market, internationally and especially in the higher growth market in the mainland of China," said Tom Lau (pictured right), PYE deputy chairman. "These films are quite contrary to the Chinese style. And they remain uniquely Legendary style."

A 500-page circular issued by PYE describes how Legendary East is also a passive investor that leaves creative and financing decisions under the control of Legendary Pictures executives.

Legendary East confirmed that its first candidate for production is the recently announced The Great Wall, to be directed by Ed Zwick from a script by Zwick and Marshall Herskovitz.

While it offered no new details on casting or synopsis, Legendary East revealed that the production will be shot primarily in China and the UK and confirmed that release is scheduled for 2013. It also provided forecasts for the film's gross box office at $160 million in North America, $223 million in international territories and $42 million (approx. RMB275 million) in China.

Other salient details from the circular include:

  • Legendary East will co-invest in two films currently set up, but not yet green-lighted at Legendary Pictures: Paradise Lost, the upcoming Alex Proyas-directed project that will also star Bradley Cooper, Ben Walker and Djimon Hounsou; and Seventh Son. The film is based on young adult novel The Spook's Apprentice by Joseph Delaney which is to be directed by Sergei Bodrov and star Jeff Bridges, Julianne Moore, Ben Barnes and Alicia Vikander. The two films budgets are revealed at $130 million and $210 million respectively. Legendary East will invest $76.5 million, or some 22.5% of their combined budgets.
  • While Huayi has an equity stake that is a fraction of the original terms announced in June, the Chinese company has considerable responsibility under the deal and must make significant sacrifices to Legendary East. Huayi is required to co-finance the green-lighted movies alongside Legendary East, with a minimum financial commitment equivalent to 5% of production budget in order to make sure that films qualify as Chinese.
  • Huayi is explicitly responsible for shepherding Legendary East projects through the Chinese government's script approval procedures and for obtaining censorship and release permissions upon completion. Huayi in return will earn a producer fee of $500,000.
  • Legendary will be paid a $3 million producer fee per film plus a 3% share of adjusted worldwide gross.
  • Legendary East and Huayi will co-own copyright.
  • Huayi is not expected to contribute any of its own film projects for production by Legendary East.
  • Huayi is set as the mainland China distributor of Legendary East's films and is required to put up 100% of p&a, leaving Legendary East as a pure-play production financier. Huayi (and the international distributor) will earn an 11% fee as distributor.
  • Huayi is specifically required to give Legendary East films 'first priority' over its own titles and must create a 'corridor' preventing it from opening other films in a two week window ahead of a Legendary East film release.
  • In addition to mainland China rights, Huayi may also be allowed to licence and release films in Hong Kong, Macau, Taiwan, Malaysia and Singapore.
  • Legendary East will produce at the rate of two films per year with release from 2013 and step up to three films per year from 2018.
  • Production budgets are set at a minimum of $50 million and capped at $150 million.
  • Talent participations are limited at $30 million per movie.
  • Legendary East will retain merchandising, consumer goods licensing rights etc. including those in China, unless bought by Huayi.
  • Legendary East will retain sequel/prequel, remake and serialisation rights.
  • Warner Bros is assumed to be the studio and worldwide distributor, though the documents make it clear that a contract has not been completed.
  • Legendary East's development committee will involve five executives, of which three will be appointed by Legendary Pictures, one by Huayi and one by PYE.
  • Legendary East's greenlight committee will involve five executives, of which three will be appointed by Legendary Pictures, one by Huayi and one by PYE.

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