Hollywood visual-effects studio DNEG reaches $1.6 bn SPAC merger to go public

Photo: @DNEG
Photo: @DNEG

Summary

Merger would come as content creators such as Disney and Netflix spend billions to accelerate movie and television production

Hollywood visual-effects studio DNEG is combining with a special-purpose acquisition company to go public with a roughly $1.6 billion valuation, the companies said.

Known for its Oscar-winning visuals work on movies such as “Inception" and “Tenet," DNEG is merging with the SPAC Sports Ventures Acquisition Corp., a blank-check firm focused on the media and entertainment industries.

The merger would come as content creators such as Walt Disney Co. and Netflix Inc. spend billions to accelerate movie and television production and compete for consumers. Some of DNEG’s recently released movies include “The Matrix Resurrections" and the latest James Bond film, “No Time to Die." The company also works on animation and has said it hopes to expand in other areas such as gaming.

Momentum in the industry has also been building amid investor enthusiasm for the metaverse, a future vision for the internet featuring online worlds where users can interact as digital avatars.

“I’ve never seen this type of demand uptick and a push toward quality and scale in the industry," said Namit Malhotra, DNEG’s CEO, in an interview. “We’re on a massive expansion spree."

Videogame company Unity Software Inc. late last year agreed to pay about $1.6 billion for major parts of Weta Digital, the visual-effects studio co-founded by director Peter Jackson and a DNEG competitor.

Last September, Icelandic billionaire Thor Björgólfsson’s Novator Capital took a 15% stake in DNEG by investing $250 million. The investment allowed Mr. Malhotra to streamline the ownership structure of DNEG’s Indian holding company, Prime Focus Ltd., after billionaire and former shareholder Anil Ambani’s business empire collapsed. Mr. Malhotra’s stake in Prime Focus rose to 70% as part of the transaction.

London-based DNEG explored a traditional initial public offering in 2019, but postponed it due to market volatility. The company has several thousand employees and offices around the world.

It would join several other companies in media, gaming and entertainment in pursuing SPAC mergers, which have exploded as an IPO alternative in the past few years.

Also called a blank-check company, a SPAC is a shell firm that raises money from investors and lists on a stock exchange with the sole intent of merging with a private firm to take it public. After regulators review the private company’s financial statements and the deal is approved, the private company replaces the SPAC in the stock market.

Companies going public through SPACs can make business projections that aren’t allowed in IPOs, one factor that makes them appealing to many firms in fast-growing industries. DNEG projects sales for the fiscal year ending in March of roughly $400 million and expects rapid growth in the years ahead.

Shares of many companies that merge with SPACs have tumbled lately as part of a broad retreat from technology stocks and early-stage companies, prompting some firms to walk away from deals and slowing the pace of merger activity this month.

As part of its deal, DNEG is raising a $168 million private investment in public equity, or PIPE from investors including Novator Capital. That money and the $230 million the Sports Ventures Acquisition SPAC raised in January 2021 could be used to expand the business, though SPAC investors can pull their money out before a deal goes through. Low share prices incentivize such withdrawals.

Affiliates of the SPAC have agreed to purchase additional shares to offset withdrawals. Formerly called Double Negative, DNEG has also agreed to new credit and term loan facilities that would coincide with the deal closing.

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