Technicolor Visual Effects Unit To Become Separate Company in Reorg

Entertainment services and hardware giant Technicolor announced a major reorganization, with plans to spin off its Creative Studios division as a separate company, issue convertible debt to reduce leverage, will change its top management, and sell its trademark-licensing unit.

Technicolor plans to spin out 65 percent of its Creative Services unit under a tax-free return of assets to shareholders under French law. The spinoff will be presented to shareholders for approval at the annual meeting in late June, and is anticipated to close in the third quarter.

The resulting company, like Technicolor, would be listed on the Euronext Paris bourse. Technicolor will consider other options for disposing of the remaining 35 percent of its Creative Studios assets, with an intention to reduce debt for both entities, it said.

The company also plans to take other steps to reduce debt, using a refinancing of current debt and issuance of 300 million euros of Mandatory Convertible Notes, which will become Technicolor shares once the spinoff is completed. Technicolor said it already has received commitments for purchase of the entire tranche of notes from Angelo Gordon, Bpifrance and others.

The conversion price for the notes would equal 2.60 euros per share, a 5-percent discount to the volume-weighted average price of shares over the past three months. Two-thirds of shareholders will have to vote to approve the new notes, in an extraordinary meeting expected early next quarter.

“After a comprehensive review, we determined that pursuing the partial spin-off of TCS from the Group, along with the full refinancing of the existing debt will be the solution that best aligns strategy, value creation and financial objectives for all of Technicolor’s stakeholders,” CEO Richard Moat said. “We are convinced that this operation is a unique opportunity to ensure both TCS and Technicolor Ex-TCS have the adequate capital structure to support their developments, long-term ambitions and organic growth. The execution of these operations will allow both companies to pursue their own strategic agendas, be more agile and ultimately thrive as independent businesses.”

After the spinoff, Moat will be proposed as chairman of the board for Technicolor, while Luis Martinez Amago, who has been head of the company’s Connected Home division, will take over as CEO. The board also added Katherine Hayes as an independent director, replacing Cecile Frot-Coutaz, who resigned last fall.

The Creative Services unit provides visual-effects and related services and technology to film, television, game, advertising, and streaming-video companies in Hollywood and beyond. It has several notable, specialized VFX and animation studios, including MPC, Mikros Animation, The Mill and Technicolor Games. The division’s studios also rely on a large production pipeline based in India, and have built an in-house Academy training program to grow its own talent base for the highly technical work.

As evidence of the busy sector, Technicolor said both MPC and Mikros Animation already are two-thirds booked for next year’s projects. In that, they are similar to many other top post-production shops across the industry, which are doing wall-to-wall business as major streaming services continue to order work for dozens of projects in the superheated battle for audience market share.

With the refinancing and new note issuance, a standalone Creative Studios unit is “expected to benefit from a leverage in line with market peers” in the capital-intensive and highly competitive VFX industry, the company said, offering “a unique ‘pure play’ equity story in a market experiencing exponential growth driven by burgeoning demand for content.”

The spinoff will help the company reduce the “conglomerate discount” by investors who tend to pay less than the sum of the parts for shares in a multi-division organization.

The company also said it has received a binding 100 million euro cash offer to sell its Trademark Licensing operations in a deal expected close by July. The company did not disclose the buyer’s identity.

Technicolor underwent a series of reorganizations and cuts in 2020 and 2021 under Moat, saving 171 million euros the first year, and another 116 million in 2021. Additional cuts in 2022 will push combined savings to more than 350 million euros.

The announcements by the Paris-based company came alongside Technicolor’s quarterly earnings, which saw revenues down 1.7 percent. The company said it had met full-year 2021 guidance, with adjusted EBITDA of 268 million euros and a negative 2 million euros of free cash flow before tax and financial adjustments.

Technicolor also reconfirmed previous guidance for 2022, saying revenues from continuing operations are expected to grow, with adjusted EBITDA of those units expected to hit 375 million euros, with free cash flow before financials and tax expected to hit 230 million euros.

The Creative Studios unit saw “strong” improvements in revenue, but the company’s Connected Home unit, which makes broadband equipment and Android TV-based set-top boxes, was affected by the same component shortages and supply-chain issues buffeting the rest of the tech hardware industry.

The company also still provides services related to DVD production and distribution, though Technicolor said the division is “working on further significant expansion of non-disc activities.” Technicolor after the Creative Studios spinoff will consist of the Connected Home and DVD Services units.