First Odeon, now Pinewood…What the sale of two cinema icons says about the UK industry

It was a sign of the times.

News of the deal to sell iconic UK film studio Pinewood to a property fund run by asset management firm Aermont (an offshoot of Perella Weinberg’s US private equity business which split from its parent company last year) came on the same day that French energy firm EDF – aided by Chinese backers – was attempting to tie up a deal to build the first nuclear power plant in the country in 20 years.

Hinkley Point would provide an estimated 7% of the UK’s electricity.

While some welcomed employment opportunities offered by the nuclear project, others questioned its exorbitant cost and wondered why the UK needed to outsource such a colossal undertaking to a French company and the Chinese government.

As it transpired, Theresa May was among those with misgivings and the long-gestating deal has once again been put on ice.

The £325m London-based Aermont could pay for the Pinewood Group (the deal has been approved by the Board but is not yet finalised) barely scratches the surface of the £18bn the French energy giant was proposing for Hinkley, but both deals raise questions over sustainability and contexts for investment.

Success story

Pinewood is a magnificent British brand and a tremendous success story for the UK industry.

The historic studio, which dates back to the 1930s, has played host to UK and US franchises including James Bond, Carry On, Alien and Batman.

In recent years, Pinewood has become the poster child for the previous government’s film (and TV) tax incentives, hosting dozens of major US productions, which contribute millions to the UK economy through ‘inward investment’ and keep thousands of crew across the production spectrum gainfully employed.

Slower periods in the 1970s and 80’s have given way to near constant occupancy. Recent US blockbusters to set up home in Iver Heath include Star Wars: The Force Awakens, Avengers: Age Of Ultron and Cinderella.

The impact has been huge. Films made in the UK grossed $9.4 billion worldwide last year, the highest market share ever of global box office.

Meanwhile, Pinewood has been voracious in its quest to build further shoot space, both at home and in international markets including Malaysia, the US, Canada and the Caribbean.

Frailty

However, surging inward investment to the UK has also masked frailty in the country’s indigenous film sector.

The UK - the world’s fifth largest economy - remains dominated by US content. Cinemas, supermarkets and living rooms are awash with US film and TV. The six US majors alone accounted for more than 75% of the UK box office in 2015.

By contrast, in the same year, production spend on UK domestic titles was down 7% and the 11% market share for UK independent films compared with 55.4% in Japan, 35.2% in France, 25% in Germany, and 18.9% in Spain.

The US, France, Germany and Japan lead the way in terms of vertically integrated studio-level companies. Meanwhile, UK TV companies have been bought up left right and centre by US and European outfits.

“The UK film industry is a powerhouse for growth,” then culture secretary Sajid Javid said in 2015.

But what kind of growth did Javid have in mind?

Trend

Pinewood executives hope new investment will kick-start the second phase of its expansion plan Project Pinewood, which according to sources has been in need of a cash injection to fulfil its next steps.

Positively, London-based Aermont is understood to be in favour of maintaining the existing Pinewood management team to see through those expansion plans.

The deal has also raised concerns, however.

One analyst told the Financial Times last week that the Aermont offer undervalued the studio and “didn’t reflect its upside” while one top ten shareholder expressed disappointment that the company would be bought by a “proxy rather than an operator.”

“It is a fair bet it [Aermont] will employ the usual private equity tactics of injecting debt and cutting costs. It might even plan to split the Pinewood property from its operating assets,” the FT surmised.

That remains to be seen.

Pinewood wasn’t alone in the dating game. This summer also saw the sale of the UK’s largest cinema chain, Odeon & UCI Cinema Group - the dusty jewel in the exhibition sector’s crown - to Dalian Wanda-owned AMC for £920m.

The long-gestating deal marks the first time the iconic operator will have a foreign owner in its 100-year history.

We should applaud and welcome reputable and benign investment and we should encourage interest in the UK’s most prized assets. Wanda and AMC have track records of savvy film plays, growth investments and keen customer awareness. As for Aermont, it is talking up Pinewood growth and it does at least have some history in the exhibition sector: another fund run by the company previously owned a portfolio of cinemas leased to the French operator UGC.

But the acquisitions throw up inevitable questions relating to the sustainability and autonomy of the UK industry.

Where were the UK media companies or entrepreneurs capable or willing to invest in Pinewood? Will we see more UK films getting space at Pinewood as a result of new ownership and investment?

Likewise, where were the UK media sector suitors for Odeon? Will already pricey cinema tickets get another hike under Odeon’s new owners? Will there be room for ever-diminishing programming diversity at the circuit, including an incentive for UK films?

The UK has flourished as the world’s preeminent service industry, predominantly for the US. It is also full of brilliant film professionals. But in the summer that two of its most iconic and market-dominant film companies are sold – one to a Chinese-owned US operator, and the other to an asset management firm which was until last year US-owned - it may be an opportune moment to reflect again on the type of film ecosystem the UK wants, and is able, to foster. Are conditions improving for dynamic and sustainable indigenous growth?

Brexit

For many, Brexit is unlikely to help in that quest.

The BFI, Creative England and Creative Skillset are among organisations pushing where they can in this area but unhelpful Brexit conditions and the film production sector’s ongoing migration to TV might make additional financial and/or structural intervention paramount in order boost UK film.

The weakness of the pound helped spark the Odeon acquisition. It is ironic, however, that for all the Brexiteers’ promises of ‘taking back control’ of the UK, the vote to leave the EU only accelerated the deal to sell a prized UK asset to the highest foreign bidder. And Odeon isn’t alone in that respect.

From energy firms to railways, football clubs to real estate, previous high-profile sales of prized UK assets have too often led to inordinate price inflation, unhealthy hierarchies and disenfranchised customers.

In the face of Brexit-induced currency woes and potential soft-money shortfalls (as well as the ongoing lack of a Scottish film studio), government, industry and the private sector should continue to consider well the opportunities available to strengthen homegrown businesses if it wants to produce future Pinewoods, Odeons and J. Arthur Ranks.