DNEG, the visual effects, and animation company behind Dune, F9, Venom, and other high-profile productions, has agreed to merge with a SPAC called Sports Ventures Acquisition Corp. in a deal that aims to take the group public with a stock listing on the Nasdaq (symbol DNEG ).
The combined company will be led by Namit Malhotra, DNEG’s chairman, and CEO.
The transaction, expected to close by midyear, implies a combined company enterprise value of approximately $1.7 billion.
DNEG is a leading VFX group that works with Hollywood studios, streaming services, and production companies worldwide with operations in North America (Los Angeles, Montréal, Toronto, Vancouver), Europe (London), and Asia (Bangalore, Chandigarh, Chennai, and Mumbai). The two-decade-old firm has been awarded six out of the last ten Academy Awards for Best Visual Effects. Upcoming projects include Uncharted, Death on the Nile, Moonfall, Stranger Things S4, Aquaman and the Lost Kingdom, Knives Out 2, The Last of Us, The Flash, and Shazam! Fury of the Gods.
Formed by the 2014 merger of Prime Focus (founded by Malhotra in 1997) and Double Negative (founded in 1998), DNEG has also focused historically on building close working relationships with filmmakers. If it is successfully listed, it would be the only pure-play publicly-traded visual effects and animation company. As a public company, it would have access to greater liquidity to grow its business along with booming demand for content.
“This transaction creates long-term stability for our teams while also allowing us to exploit the tailwinds in the media and entertainment industry and the explosion in demand for content, which are huge growth drivers for our company,” said Malhotra. “I am excited to take the best of everything that makes our company so successful and to use it as a platform on which to build and innovate further. Leveraging our leading technology stack, DNEG is already making great strides into new growth areas such as gaming and content creation partnerships, and we are perfectly positioned to exploit massive new opportunities in the metaverse and the convergence of all forms of content creation.”
DNEG projects circa $400 million in revenue and adjusted EBITDA of $100 million for its fiscal year ending in March 2022. As of Sept., it had approximately $731 million in the order book and pipeline for FY22 and beyond. Current DNEG equity holders will retain approximately 71% ownership in the combined entity and will, assuming no redemptions by Sports Ventures’ existing public stockholders, roll 85% of their equity interests into the pro forma company.
It’s worth pointing out that the news comes even as an army of SPACs (so-called “blank-check” special purpose acquisition companies that exploded over the past several years) appears to be losing steam, having trouble finding targets and in some cases seeing investors drop out. “The SPAC Ship Is Sinking,” wrote the WSJ in a story earlier this week.
SPACs are formed by a combination of executives, investors, funds, or other backers who take the SPAC public and then search for an actual operating company to buy. For targets, it’s a faster, easier, and cheaper way to enter the public market without launching a traditional IPO.
Some have done incredibly well, like DraftKings which merged with Harry Sloan’s Diamond Eagle SPAC in 2019. The longtime media industry player has been launching SPACs for years and knows what he’s about. But many falter, especially lately. SPAC investors can pull cash out any time before a deal is closed and that’s been happening not infrequently. BuzzFeed is a recent example in the media space. It was hit by a flurry of investor withdrawals ahead of its public listing in December after merging with SPAC 890 Fifth Avenue Partners Inc.
DNEG said it expects to receive approximately $400 million in gross transaction proceeds, including a fully committed $168 million common stock PIPE (private investment in public equity) at a purchase price of $10 per share from leading investors including affiliates of Sports Ventures, Novator Capital Limited, affiliates of Fairfax Financial and Arbor Financial. An affiliate of Sports Ventures has agreed to backstop a portion of the $350 million minimum cash condition, subject to limitations.
The proposed SPAC deal has been unanimously approved by the board of directors of Sports Ventures and DNEG; it remains subject to approval by Sports Ventures’ stockholders and other customary closing conditions. Under the agreement, current DNEG equity holders will retain approximately 71% ownership in DNEG and will roll 85% of their equity interests into the merged company (assuming no redemptions by Sports Ventures’ existing public stockholders).
DNEG’s competitors include Peter Jackson’s Weta Digital, which sold its technology and tools business for for $1.625 billion last fall to game-development software vendor Unity. Also last fall, Netflix bought Scanline VFX, the company that has worked on Netflix originals like “Stranger Things” as well as tentpole movies for Marvel, DC and others.