With the proposed sale of Rainmaker to DeLuxe for a package totaling $35 million, Digital Domain's proposed $100M million public float, and a possible sale of Sony Pictures Animation for $500 million, we take a look at the value of an effects house. What is it worth, what should it be worth and just how much has Pixar affected the market.
How much is a facility worth? With the current round of sales and possible sales, it is possible to get a minor snapshot of the industry and begin to answer that question. By being a publicly traded company, you unlock massive doors to investment funding, but you also are required to disclose your financial details. It is the cost of business for a public company.
Through these public accounts we have pieced together this story about industry valuation. This article is based on publicly listed documents and not on exclusive or insider knowledge of the companies discussed. Dollar amounts are quoted in US Dollars.
One of the greatest factors in determining the price or value of a facility is its role as either contributor or owner of the primary properties -- in other words, does it make its own films or someone else's projects.
On January 24, 2006, The Walt Disney Company agreed to buy Pixar for $7.4 billion through an all-stock transaction. The price set the bar for valuations. The acquisition was completed on May 5, 2006 (swapping one Pixar share for 2.3 shares of Disney), making Pixar a wholly owned subsidiary of Disney. The implications of this are still being felt nearly two years later. Pixar was taken public by Steve Jobs at a remarkable early stage in the company's life, but the gamble paid off due in no small part to the amazing success of the films and the fact that Pixar owned the rights to those films.
For many years effects companies had been 'guns for hire' and had no intellectual property (IP) rights or copyright over the finished films. The studios owned the films. But with Pixar it became clear to an entire generation that the real money lived with the content ownership, and thus the last decade has seen a vast interest in effects companies moving from making someone else's films to making their own.
Sony Pictures Imageworks
The NY Times reported in October that Sony Pictures Entertainment is considering selling half of its fledgling animation studio. Sony animation is responsible for Surf’s Up and Open Season. The New York Times suggested that Sony was possibly selling even more of its thriving 15-year-old digital visual-effects company, Sony Pictures Imageworks (SPI). SPI was the principle effects house in the films Stuart Little, The Polar Express and the Spider-Man movies.
David M. Halbfinger and Andrew Ross Sorkin of the New York Times reported that Sony Pictures, a unit of the Sony Corporation, has hired the investment bank Houlihan Lokey Howard & Zukin to assess the value of the two divisions. An outright sale of both, which is possible, could bring around $500 million, according to people involved in the discussions.
All told, Sony has invested more than $400 million in the animation and effects businesses over the years, but the New York Times reported that "a sale of the animation business would resemble a slate financing deal, in which a studio sells a stake in a fixed number of movies, except it would be open-ended, the person said. The person said Sony planned to retain at least some interest in its special-effects company, Sony Pictures Imageworks. Though Imageworks is a lower-margin business,"
SPI now matches the levels of ILM and Weta Digital as one of the biggest effects houses, and it has been expanding. It bought 50% of what now is Imageworks India, where it employs about 85 workers and is to open a new plant in Albuquerque next year. The state of New Mexico has been incredibly aggressive with tax incentives in order to help bring Hollywood to the area.
Herein lies the difference: SPI does not own the films, but Sony Animation does. At the moment the fit works well for Sony. According to the same article , the SPI generates work for hundreds of Sony animation workers between feature films, times when they would otherwise have to be laid off. Saving money on downsizing and ramping up between animated films means those films can be made at two-thirds the cost of films by rivals like Pixar and DreamWorks Animation, the company says.
According to people involved in the talks, potential buyers include investors who believe the company could expand by getting into the production of computer games and television advertisements, which rely heavily on the kinds of effects the company has become known for. But Sony is likely to seek one transaction with an investor in both Imageworks and the animation side, given the degree to which the two businesses are intertwined.
Not included in the sale discussions is Sony Online Entertainment, the maker of multiplayer interactive computer games like Everquest.
Digital Domain's decision to take the company public is in line with Sony's moves. Digital Domain's board of directors plans to raise about $100 million "to pay off debt and maybe produce films, apparently in an attempt to compete with the DreamWorks Animation and Disney's Pixar Animation," according to the Hollywood Reporter. The company has an on paper capitalization of $38.8 Million but would be worth much more if taken public.
Digital Domain (DD) is a good company with an outstanding list of credits. Mark Miller, CEO, previously worked for Lucasfilm Ltd. and Industrial Light and Magic for 22 years, where he held several senior level positions including Vice President and Senior Executive in Charge of Production and marketing from 2000 to September 2006. The Vice Chairman and former CEO is Carl Stork, who previously worked Microsoft where served in a variety of executive management positions, including technical assistant to Bill Gates. The management team, including Co-Chairman Michael Bay are all in their 40s except one, and the board of directors interestingly includes John Sculley, the ex-Apple CEO (1983-1993).
Based on its SEC filings, we get a real window on the visual effects business and why a company like Digital Domain would be so keen to move from being an effects house and move to being a studio. The Digital Domain board's decision is to explore both their own properties and an increased role in gaming. Interestingly, the one part of Soy Entertainment's businesses that is not for sale is the section involved with gaming.
In their SEC filings it is easy to see why DD thinks this. In their filing documents, the Board quotes Veronis Suhler Stevenson as to the size of the over all market in which Digital Domain operates:
- Box office and home video spending in the United States generated $35.4 billion in 2006 with 4.6% annual growth rate.
- Animated and visual effects-driven films have been a key driver of the growth of the filmed entertainment sector. For example, the top 20 grossing films of all time, the top 10 grossing films of 2006, and the top 10 grossing films of 2007 (through September 30, 2007), ranked by worldwide box office revenues, were made using significant high-end visual effects or computer-generated animation.
- The visual advertising industry (comprised of all segments of the $209.8 billion advertising industry, excluding broadcast and satellite radio) in the United States was approximately $188.9 billion in 2006. With a 5.4% annual growth rate.
- The visual advertising industry is quite broad and fragmented and consists of advertising in a variety of media, including, in 2006, broadcast and pay television advertising ($70.5 billion), online advertising ($15.1 billion), print advertising ($95.8 billion), out-of-home media advertising ($7.1 billion), and mobile advertising ($0.5 billion) . Currently, the majority of Digital Domain's Ad revenues derived from work in the television commercials market.
- The video game industry is a $10.0 billion market in the United States, and one of the fastest-growing media-related sectors, with a 15.6% annual growth rate.
These broad figures indicate why there is so much interest in animated films and gaming. So what can we learn from Digital Domain's filing about where the business is at today?
SIDE NOTE: As fxguide is aimed at artists, let us explain an important financial concept. When looking at companies, one finds a naturally complex and sophisticated financial structure. This is to be expected and yet it can make the financial reporting of any company somewhat more complex if you are not familiar with the concepts. A key concept is "Earnings before Interest and Taxes" or EBIT. For most people EBIT is a good 'sensible' look at profitability and an excellent point in the financials as taxes, losses brought forward, restructuring costs, loss on sale of property, plant and equipment, ...etc can all make bottom line numbers less indicative of a companies underlying performance.
In 2006, DD had sales of approximately $68 million and an operating loss of around $1 million EBIT. After EBIT this is closer to a loss of $1.6 million, excluding the Foundry, who had sales of around $3.5M and a profit after EBIT of $450,000. In the nine month period until Sept 30th of 2007, DD sales were $56.5 Million, and running at a $7.57 million loss before EBIT. The numbers after EBIT are affected greatly by changes with Warrant liability, taking the loss to closer to $15 million.
In the four years prior to 2005, revenues have been approximately similar, ranging from about $33M in 2002 to $60M -$61M in 2003 and 2004 respectively. 2005 was about $49.5 Million in gross Revenue.
That translated to a bottom line (EBIT) of approximately:
2002 - $4.3M (loss)
2003 $3.9M (profit)
2004 $7.1M (profit)
2005 - $4.2M (loss)
Those are interesting numbers, but we can look further into the basic profitability of doing commercials, software and feature film effects and production.
In 2006, the $67M was made up around 65% features, 34% commercials, and 1% Software (mainly Nuke at that time). If you look at the divisional gross profit, software was vastly the most profitable, but too small to make much difference. Feature work was significantly more profitable than commercials work in 2006. If you combine 2004, 2005 and 2006 for an average, commercial work is equally profitable to film work. This is surprising, as the commonly held belief is that commercials work is much more profitable than feature film work.
To do all this, as of September 30, 2007 Digital Domain employed approximately 486 full and part-time employees. Of that total, approximately 465 are located in the Venice, California office and 21 are located in the U.K. office. Digital Domain's main office, in their five buildings in Venice, California, consisting of total of 101,965 square feet of office space.
Moving around the World, how realistic is the suggested $100 million Digital Domain price tag?
In 2005 Thomson, bought The Moving Picture Company (MPC) from British broadcaster ITV for £52.7 million, which is US$106 million. The Moving Picture Company, which is located in the Soho district of London and employs around 400 people, does visual effects and post-production work in films and television.
MPC is best known for its film work on Harry Potter films, Troy, Alien vs. Predator and Lara Croft: Tomb Raider. Over the previous 12 months, MPC generated over £44 million ($63 million) in total sales. Making it larger than Digital Domain, but with slightly less full time staff.
At that time the company published that the worldwide post-production market was then worth around €4 billion (US$5.8 billion). Thompson claimed that visual effects had become one of the highest profile and fastest growing value-added post-production services, representing around €500 million of the worldwide post-production market.
MPC is also widely recognized in the commercial advertising industry for producing high-end commercial content for many world-leading advertisers including Nike, Levis, Motorola, Adidas, and Coca Cola. However, the internal breakdown of features to television commercials is not known. MPC was stated to be a cornerstone for future growth of Thomson’s visual effects adding to already strong Technicolor Hollywood-based broadcast visual effects and Toronto-based VFX facilities.
In Canada, a similar situation exists as shown by this month's slate sale of Rainmaker. The visual effects house is well known for a long history of outstanding visual effects and, according The Canadian Press, Rainmaker is being sold to DeLuxe for a package of $31 million consisting of:
- $14.0 million in cash
- $2.5 million by way of a promissory note due one year after closing
- $6.0 million earn-out based on revenue targets
- $3.5 million assumption of capital leases
- $5.0 million Deluxe service credits available to Rainmaker Animation operations
Interestingly once again there is a split based on content creation. The purchase will include Vancouver-based Rainmaker Visual Effects and Rainmaker Post, along with Rainmaker's visual effects facility in London. The deal does not include Vancouver-based Rainmaker Animation.
Rainmaker has about 160- 175 employees. Based on the Annual General Report of Rainmaker Income Fund (2006), Rainmaker Post-production had sales of approximately C$12 M, and Visual effects sales of approximately C$16 M for 2006.
The Animation group has been in production on four direct to DVD projects, a television series and their first animated feature film, Escape From Planet Earth. Rainmaker Animation is aiming to build out the animation facility for the feature film production. The company stated in their press release that they "are also looking at a number of opportunities to expand the animation business, including the revival of ReBoot, the classic animated episodic television series, as a trilogy of feature length films".
The Hollywood Reporter reported that after the sale, Rainmaker Entertainment will focus on production of computer-animated films and development of its own film properties. Warren Franklin will remain CEO. The animation unit is in production on the Weinstein Co.'s Escape From Planet Earth and in development on a 3D feature trilogy based on Rainmaker's TV series ReBoot as well as additional 3D titles that have not yet been announced.
DeLuxe gives a view on the value of 'old school' established brands and operations as it was sold in 2005. MacAndrews & Forbes Holdings Inc. acquired the Deluxe film processing and creative services business from The Rank Group Plc. for $750 million nearly two years ago.
For the last year of figures we could obtain, for the year ended 31 December 2004, Deluxe Film generated profits before interest and taxation(EBIT) of £52.9 million on sales of £366.0 million.
In that year, Deluxe Film processed 4.3 billion feet of film, (primarily release prints by volume) but in part due to the advent of Digital Cinematography, and the growth of Digital projection. DeLuxe has moved into post more aggressively. Its services now include motion picture film processing, printing and distribution; EFILM digital intermediates; post production and subtitling services; titles design and digital VFX; DVD compression, encoding and authoring; digital cinema services, digital asset management and digital distribution. Deluxe facilities include: Los Angeles, Toronto, London, Rome, Florence, Madrid, and Barcelona.
VTR London & Prime Focus
There are constantly changing company structures in the world of post production and this is not limited to players in Europe and the United States. As we reported last month, Prime Focus Group (India’s biggest integrated post-production company) purchased the Hollywood and New York-based Post Logic Studios and Frantic Films’ VFX offices in Los Angeles, Winnipeg and Vancouver. Prime Focus also operates six facilities in India and four studios in London offering a comprehensive range of services ranging from visual effects, digital film lab (DI, film scanning and film recording) telecine, editing, motion control and HD production. The company that was formed in a garage with four people and an investment of $10,000 has grown to an organization of over 1,250 people with a current market capitalization of over $400 million.
Prime Focus is the primary shareholder of UK VTR PLC. VTR group has recently restructured from five to three brands. Prime Focus London (the new brand name that comprises the merged entities of Clear, the hive and VTR Ltd) has emerged after eleven months in the making, servicing Advertising, Film and Broadcasting markets.
Prime Focus London is the Group's visual effects specialist facility. It has recently installed and upgraded of twelve smoke and flame effects suites. They have also recently commissioned a Lustre data grading suite to work along side their Thomson's Spirit 4K. The film division also added Digital Fusion workstations to work on film and project based visual effects. Their credits included the rebrand of both BBC1 and BBC2, music videos for Robbie, Pink, The Scissor Sisters, Gnarls Barkley, Just Jack, Paul McCartney and features work on British zombie thriller 28 Weeks Later.
According to AFX News Limited, VTR PLC posted a pretax profit of £1.0 million for the seven months to March 31 on sales of on £10.60 million. Operating profit for the period stood at £1.24 million, against an operating loss of £1.53 million for 2006, the company said.
VTR PLC highlights the last part of the equation when valuing a facility: indebtedness. The company also reported lower gearing for the period, down to 38 pct from 48 pct last year. They now have net borrowings of £3.7 million . Gearing of a company is natural and to be expected, but it can greatly affect the purchase price of a facility, as well as being both a source of growth and a risk in cyclic downturn periods. This was also seen in the valuation of Rainmaker earlier in this story.
As with any publicly listed company it is transparent how the market values the company. In the case of VTR PLC, they are valued at a price of £14.9 million as of time of publication. With a modest Price to Earning of 14.92. And interestingly this is a price of 1.41 to sales.
So what is your facility worth ?
The two common multiples used are the price/earnings (P/E) ratio and the Earnings before Interest and Tax (EBIT) multiple. To choose an appropriate multiple, one can look at the exit multiples achieved on recently completed deals in your sector. One can also compare P/E ratios for comparable quoted public companies and apply a discount. On average, private companies are sold at discounts of between 30% and 50% to quoted companies.
Historically, the P/E ratio has been the common route to valuing private companies. The P/E is the ratio of the market value of the equity of a business to its after-tax earnings. The EBIT multiple is similar to a P/E ratio, but focuses on a company’s Earnings before Interest and Tax. P/E and EBIT multiples can vary widely depending upon the level of interest from prospective purchasers. P/E on listed companies is typically in the 10-20 range - except for internet stocks - which have so much price built in based on the hope of vast growth. For instance, Google has a P/E of 53, while The Walt Disney Company is trading at 14.67. EBIT multiples ranged from as low as 4.5 to as high as 9.
It is very also hard to gain a wide sample, as many companies are either in private equity or part of larger groups. The Santa Monica, California based Ascent Media Group alone owns more than 70 facilities in California, New York, London, Singapore and other locations throughout the world. Ascent Media Group is a wholly owned subsidiary of Discovery Holding Company (DHC). Assent Media itself employs over 4000 people in total (2,900 in the US alone). DHC, in addition to Assent media owns a non-controlling 50% interest in Discovery. The Creative Services group division of DHC / Assent media accounts for $ 417.8 M in sales and thus it is very hard to get an accurate valuation of any of the individual high quality post facility in the group such as Blink Digital, Cinetech, Company 3, Encore Hollywood, FilmCore, Level 3 Post, Method, One Post, R!OT, Rushes, Soho Images, or say Todd-AO.
Announced this month, Ascent media may be spun off into a new company as the parent company merges with another Discovery shareholder. The new spin off Ascent Media will be just the creative services group. According to Marketwatch.com, the deal is expected to be finalized by the second quarter of 2008.
For many people who don't own the facilities at which they work, it is hard to get exact profit and loss statements, especially of companies that are not publicly traded. It is often possible to find out the company's gross sales. Hence we offer this observation: many companies in our industry are priced at about 1.4 to sales. This is a very very rough rule of thumb based on the companies in this story in multiple countries over a 2 to 3 year period but, if we place that same simple 1.4 Price to Sale (P/S) metric on other companies in our story:
Sales of $68.8 M, Est. Price $ 97 M
Not far off the $100 million price speculated in the Hollywood reporter.
Sales of £366.0 M, Est. Price £ 512
Actually sold for £750
Sales of £44 M, Est. Price of £ 62
Actually sold for £52.7
Sales of C$28M, Est. Price of C$39.2M
Actually sold for $31M
In the end, a company is worth what someone is willing to pay of it, yet several trends appear to be global. There is a move to producing one's own work, over someone else's, and when you get this right the value of the companies involved raises dramatically.
We make no comment on investing in any of these companies, but for full disclosure some members of fxguide, LLC may own small amount of stock in some of these companies.
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