#HTE

As the consumer appetite for digital entertainment in China continues its rapid growth, two companies are combining forces to step up their game in the space. Today, China Literature — the Tencent e-publishing venture that went public with a $1 billion IPO last November — announced that it would acquire Chinese digital production company New Classics Media for around $2.2-2.3 billion (RMB15.5 billion).

This is a consolidation of sorts not just in digital media, but in Tencent’s content interests: New Classics Media had been eyeing up an IPO of its own but instead picked up Tencent as an investor just in March of this year, when the Internet and messaging giant paid existing backer Chinese VC Enlight Media $524 million for a 27.64 percent stake in the company.

That deal valued NCM at about $1.9 billion. In other words, this represents a small but clear return for Tencent, which it most notably owns messaging giant WeChat but is also an investor in Snap, Uber and a number of other companies and is sometimes called the “Softbank of China”.

China Literature already was a strong content partner of Tencent’s using its Tencent Video, WeChat and other channels to distribute China Literature content; now it will ramp that up with more video based on China Literature’s material from a partner that has a string of successful blockbusters — titles include Some Like It Hot, Never Say Die and Goodbye Mr. Loser — as well as TV and web shows such as The First Half of My Life, White Deer Plain, The Kite, The Imperial Doctress and Yu Zui. 

Indeed, the deal is bringing together one of the bigger original content developers (China Literature) with one of the bigger video content producers (NCM) in the region. China Literature, according to its half-year results also out today, said that its monthly active users are up 11.3 percent to 213.5 million, with 7.3 million writers on its platform. The company’s revenues are up 18.6 percent to $345 million (RMB2.3 billion), with gross profit at a 52.4 percent margin at $180.8 million.

China Literature had already been working with third parties to produce video based on its written work, and NCM had been sourcing original content from third parties as the basis of its video, so this will essentially cut out the middle man for both sides.

“Users are increasingly demanding high quality video entertainment content which in turn drives the demand for literary works for various content adaptations. We are the pioneer and leader in online literature market and thus in providing source material for China’s most-watched TV series, web series and films,” said Mr Wenhui Wu, co-CEO of China Literature, in a statement.

“Further enhancing our content adaptation expertise is a natural next step for China Literature to unleash the commercial potential of our content library, drive integrated development of blockbuster titles, and enhance engagement of our writers and users.”

“Mr Huayi Cao and the NCM team have built up an outstanding track record of consistently producing popular, high quality TV series, web series and films,” said Xiaodong Liang, the other co-CEO of China Literature, in his statement.

“NCM represents a scarce opportunity for China Literature to extend its content capabilities downstream, enabling it to participate further along the IP value chain and enhance the services it can bring to its writers as well as its users. We believe that this combination will create significant long term strategic value for China Literature’s shareholders.”

You can think of this deal similar to what Amazon, as an example, has developed in house with its own original programming: the company will sometimes look to Amazon’s own in-house team and its literature catalogue when commissioning video; but it will  also cut deals with outside companies.

Similarly, China Literature notes that NCM will not be its exclusive partner. “The current management of NCM will continue to oversee the TV series, web series and film production business and will be empowered to make original content selection choices, including those from outside of China Literature’s platform,” it notes.

“The Company believes such arrangement will incentivize NCM’s management team and facilitate future business performance, while enabling NCM to access China Literature’s content library, writer’s platform and editorial expertise.”

“From the beginning, we have focused on ensuring that NCM is the benchmark for Chinese TV series and film production in terms of quality,” said Huayi Cao, founder of NCM, in a statement. “This process starts with the high quality source material, and China Literature is the original content powerhouse for many of our best productions. China Literature will provide us with access to the richest literature content library in China and enhance our credibility as a leading production house for TV series, web series and film. I can think of no better home for NCM as we work in partnership towards creating better content for our audience.”

China Literature said it will pay RMB5.1 billion in cash plus RMB10.4 billion in stock, “including an earn-out mechanism to align the long term performance and incentives of NCM’s management team.” The deal is expected to close in the second half of 2018.