20th Century Fox’s departure from the visual-effects business is under way.

The studio agreed Wednesday to sell visual f/x house VIFX to computer animation house Rhythm & Hues for about $5 million in cash, sources said. Fox paid around $8 million for the company in 1996.

Once completed March 15, the merger will create one of the largest privately owned visual f/x and animation studios in Los Angeles, with VIFX operating under the R&H banner.

VIFX is readying to move out of its Marina del Rey facility and into R&H’s headquarters in Los Angeles’ Mar Vista district.

The core management team at VIFX will remain intact, with VIFX prexy Richard Hollander serving as prexy of R&H’s feature film division. John Hughes continues to serve as prexy and CEO of R&H.

Layoffs likely

But layoffs are expected for VIFX’s 108 employees, not only because there will be an overlap of job functions, once the merger is completed, but also because R&H recently pink-slipped a number of its own staffers, Hollander said.

R&H employs nearly 250 digital artists. The combined companies will include just over 300.

“We’re walking into another infrastructure with its own overhead,” Hollander said. “We’re going to get rid of our own overhead and that will affect some people.”

Adds Hughes, “We are very committed to producing the highest quality work while providing an excellent environment for our employees. This merger brings many more talented people to Rhythm & Hues.”

Fox’s purchase of VIFX was initially tied to plans to have the f/x house produce all of the CG-animated sci-fi pic “Planet Ice.” Development changes ended up sending pic to Don Bluth’s Fox Animation Studios in Phoenix.

The VIFX sale, however, does not mark Fox’s complete departure from the f/x game. It is still retaining its Harrison, N.Y.-based Blue Sky character and computer graphics operation, which VIFX acquired in 1997. The company employs nearly 80 artists.

Fox has no plans to sell Blue Sky, sources said.

Fox’s retreat reflects similar action taken by Warner Bros., when it shuttered its inhouse Warner Digital f/x division in 1997, a year after opening it.

Unusual relationship

Although Fox owned VIFX, the relationship between the two companies was unusual when compared with deals between studios and their own inhouse operations such as Disney’s DreamQuest Images, Sony Picture Imageworks and DreamWorks’ Pacific Data Images, which are assigned most of the studio’s f/x-driven pics.

VIFX said it didn’t want to be dependent on the studio for work.

“Our relationship with the studio was at arm’s length,” Hollander said. “We bid on projects like everyone else. The studio didn’t have too many effects films in the works and we didn’t want to be dependent on that.”

Deal, which enables VIFX to attract larger f/x pics, also marks the second f/x house acquisition to take place in just weeks, after San Francisco-based Manex acquired CFC-LA from U.K.-based post production house Megalomedia plc.

“We were too small to handle the kind of larger effects pics we wanted to do,” Hollander said. “There’s a lot of work coming and we needed to be bigger to bid for those projects.”

VIFX recently landed U’s f/x-heavy “End of Days.” Its past credits include f/x for Par’s “Star Trek: Insurrection,” New Line’s “Blade” and Fox’s “The X-Files.”

R&H created f/x for U’s two “Babe” pics and Warner’s “Soldier,” and is creating visuals for U’s upcoming “Mystery Men,” “The Flintstones: Viva Rock Vegas” and Warner’s “The Green Mile.”