HONG KONG/SHANGHAI (Reuters) – Global investors are pumping money into China’s opaque media sector as Beijing beckons foreign capital to help it boost the culture and entertainment sectors in the world’s most populous nation.
Investors are raising at least two multi-hundred million dollar media-focused funds, while global giants such as News Corp (NWSA.O) have also started to test the market with small deals.
Late last month, the State Council, China’s cabinet, surprisingly announced that it would welcome foreign and private capital to invest in its media-related areas including printing, culture and entertainment businesses amid industry consolidation.
“I think China’s media sector is becoming more open to private capital than ever before as the government needs big money to help it develop the whole media industry,” Neil Shen, Sequoia Capital China’s founding partner, told Reuters.
Last month, Reuters reported BOC International Holdings Ltd, the flagship investment banking arm of Bank of China (601988.SS) (3988.HK), is raising a media-focused fund.
State-owned China Development Bank is also working with other investors to launch a media fund backed by the local government of Shanghai, China’s financial capital, industry sources said.
However, dealmakers and analysts warned investors should bear in mind political risk when making investments in China’s media sector as the Communist Party is keen to retain tight control over content providers who may stray from their political agenda.
“Running a media company has its risks and that’s the fact in China,” said Harry Man, a China partner of leading U.S. venture capital firm Matrix Partners.
“Take it or leave it. If you don’t want to take this risk, don’t invest in it,” he added.
Last month, Sequoia Capital and Matrix Partners, teaming up with a local firm, agreed to invest $15 million in Poly Bona, a Chinese movie maker and distributor often described as China’s Miramax.
More recently, AdChina, an online advertising agency, received $30 million from investors including GSR Ventures and News Corp, in a deal backed by Wendi Deng, Rupert Murdoch’s wife.
WHAT TO INVEST IN?
This won’t be the first time investors are making a beeline for the media sector in China.
The 2005 listing of Focus Media Holding Ltd (FMCN.O), China’s top digital advertising firm, attracted foreign investors to other new media firms in the following two years on the hope that Focus Media’s success can be easily copied. But the market became overcrowded and many of the new firms fizzled out.
At one time, China had hundreds of video-sharing sites similar to Google’s (GOOG.O) YouTube.com, while now only about a dozen like Youku.com and Tudou.com survive as major players.
These potential winners in China’s video-sharing business are already backed by foreign investors like IDGVC.
Dealmakers told Reuters the new wave of investments in China’s media business will be into vertical portals such as eHi and Anjuke as venture capital firms now are more cautious and want to focus on specific business models. Vertical portals are Internet websites specializing on a particular topic.
Shanghai-based eHi, a popular car-leasing site, and Anjuke, an online property-searcher, both recently received new funding from foreign investors.
Local social networking and mini-blog sites like Xiaonei.com and Zuosa.com, clones of Facebook.com and Twitter.com, are likely to be hot destinations for venture capital.
Compared with the price tag for a stake in firms like Facebook, small Chinese firms are much cheaper for investment and foreign funds believe some of them will be leaders.
TRADITIONAL VS NEW MEDIA
Traditional media such as newspapers and TV may still find it hard to get big foreign money not because they are not attractive but because of political concerns, said dealmakers.
But there are some new positive signs.
In June, Japan’s Softbank (9984.T) signed a partnership agreement with state-owned Shanghai Media Group (SMG), to explore cooperation opportunities.
Softbank may be allowed to buy a minority stake in some fashion and business TV channels run by SMG, China’s No. 2 broadcaster, though it cannot get its hands on anything involving news and editorial production, according to industry sources.
“The closer you get to TV production or broadcast, that will be regulated more seriously and will face more scrutiny,” said Jenny Lee, a managing partner of GGV Capital.
“New media will face a certain level of scrutiny but the government has adopted a pretty open stance and encouraging stance toward investment,” she said.
Investors are also concerned about Beijing’s fast-changing media policy, making dealmaking more challenging than elsewhere.
For instance, despite Beijing’s recent decision to open its media sector for investment, China said on Thursday that it may appeal a World Trade Organization ruling against its controls on imported films and books.
“There are regulations coming in and they are changing everyday but if you are smart enough, you will know how to navigate and how to play round the game. Then that’s not a problem,” said Matrix Partners’ Man.
By George Chen and Melanie Lee
(Editing by Muralikumar Anantharaman)