Film joint venture wins bid for US effects firm

The US divisions of Beijing Galloping Horse Film & TV Production Co Ltd and an Indian company won a bid at auction this week for some of the businesses and assets of the visual effects and animation company Digital Domain, which produced the effects for Titanic and other films.

The Chinese entertainment company's purchase of the Hollywood company, which filed for bankruptcy on Sept 11, is the latest in a series of deals that has seen Chinese firms invest in the US film industry or vice versa.

Galloping Horse's partner in the transaction is the India-based Reliance MediaWorks Ltd. The companies agreed to pay $30.2 million for Digital Domain's special effects unit and various other businesses and assets. The Chinese company now owns 70 percent of the new joint venture and the Indian company 30 percent.

Responding to criticism that Galloping Horse had overpaid, Ivy Zhong, vice-chairman and managing director of Beijing Galloping Horse Film, tried to distinguish the deal from the Chinese conglomerate Dalian Wanda Group Corp Ltd's purchase of AMC Entertainment earlier this year, which some said came at too high of a price.

"Wanda is responsible for AMC's debt obligations, but we are starting with a clean slate with Digital Domain," she said.

Noting that another bidder for Digital Domain had put forward a price of $15 million, Zhong said that was merely a starting price and was misinterpreted in some media reports. "At its highest, Digital Domain had a market valuation of $400 million. As its main business has not changed, we believe we got a very good deal."

Digital Domain, which was founded in 1993 by James Cameron, the director of the films Titanic and Avatar, and the deceased special effects guru Stan Winston, was listed on the New York Stock Exchange in November 2011.

"But soon it overreached itself and diverted from its main business," Zhong said. "It invested in everything from education and animation to even its own office buildings. It had a big cash flow problem. On top of that, it suffered from short selling."

Digital Domain moved into film production by investing directly into Ender's Game, a big-budget computer graphics-laden film based on a popular science-fiction novel.

Zhong said she is relieved that the company's troubles are behind it. Even the parties that had threatened to file lawsuits over the deal have now accepted it.

"For example, the Canadian government was afraid we might leave Vancouver, where Digital Domain had an operation," Zhong said. "But we assured them we wouldn't."

As for Digital Domain's animation business in Florida, one of the investment projects that almost brought down the company to its knees, "we don't need to worry about it as it's already shut down", Zhong said.

John Textor, former CEO of Digital Domain, has been the subject of much blame for his management of the company. Critics have said he tried to do too much at once and was oblivious to economic realities.

To prevent talented workers from being lost in the shuffle, Galloping Horse America has been quick to re-sign their contracts. "It is a competitive business, and we must not let our talent think they are being overlooked."

In the merging of different corporations, Galloping Horse said it wants to ensure new employees are treated in a way they are used to.

"We deal with the creative type here in China as well," Zhong said. "We know the most important thing is to respect them and their work."

She said many of Hollywood's biggest studios are clients of Digital Domain. Most of them have told her they will stay with Digital Domain under the new ownership arrangement.

This is not the first time Galloping Horse has taken an interest in the Hollywood company. Before the bankruptcy, it had made a small investment in Digital Domain, buying "around 1 percent of its total equity", Zhong said.

"Not all of that is lost," she said.

She alluded to a "special arrangement", declining to talk about it in detail.

As for whether Galloping Horse will bring some of Digital Domain's technologies to China, Zhong explained that the effects company mainly works on movies that have a budget of $100 million or more.

"Very few productions outside Hollywood are that expensive," she said.

But it is possible that less-advanced technologies may be shifted to China or India to take advantage of the lower costs of labor found in those countries.

"The US, China and India are at the cutting edge in the use of such technologies. So, a business that joins all three is in a better position to compete."

In Galloping Horse's vertically integrated business model, "Digital Domain will be upstream, so to speak", Zhong said. "Many people mistakenly put special effects in the category of post-production. But the kind of effects that Digital Domain produces, say, those used for virtual characters such as Gollum in The Lord of the Ring, have to be worked on from the beginning of the creative process. They're not something you add at the last minute."

"Digital Domain, which has changed hands many times, is among the best in the business," said Ben Erwei Ji, managing director of RG Communications.

"It provides the missing link in Galloping Horse's hope of becoming a full player in the entertainment industry."

Hu Ming, vice-president of Huayi Brothers Media Group, one of the leading private film production companies in China, gave his blessing to the acquisition.

"I believe it will prove to be a significant venture into the film sector," he said.

"The acquisition is a good thing for our film industry as a whole, as domestic special effects companies still have a long way to go to be as original as their Hollywood counterparts," said Wang Guowei, president of National Film Capital Co Ltd, a government-backed film fund company.