Searchlight Capital acquires Digital Domain

VFX in L.A., SF, Vancouver continue; Florida operations severed

After several weeks of high drama, troubled Digital Domain Media filed for Chapter 11 in the U.S. and Canada and agreed to sell its production business to Searchlight Partners Capital for $15 million.

Senior bondholders led by Hudson Bay Master Fund also agreed to provide $20 million in financing that will keep the company operating.

“We’re excited. This is really like a new chapter, a Digital Domain rebirth. We’re back,” Ed Ulbrich, CEO of new entity Digital Domain Prods. told Variety. “For me it’s a thrill, a relief. It’s been quite an emotional roller coaster the last few weeks. It’s great to be back doing what we do and focusing intently on that business.”

Both the sale and the financing must be approved by the bankruptcy court. The sale will be part of a public auction and the company will ultimately sell to the highest bidder. The financing would allow Digital Domain Prods. and Mothership Studios in California and Vancouver to continue to operate and honor client contracts.

Employees at Digital Domain’s Venice, Calif. HQ and its branches in Vancouver, Canada and the San Francisco Bay Area will retain current salary and benefits.

Digital Domain, founded by James Cameron, Scott Ross and the late Stan Winston in 1993, has long been one of the major vfx studios serving Hollywood. It won Oscars for its work on “Titanic” and “The Curious Case of Benjamin Button.” It also has a thriving business creating vfx for commercials.

With this sale, Digital Domain returns to something similar to its original configuration. The controversial Digital Domain Institute is not part of the new company. It remains as part of the rump Digital Domain Media Group and continues to operate in conjunction with Florida State University. Whether students will continue to work on Digital Domain visual effects projects has yet to be determined.

Also severed from the new Digital Domain is the 3D conversion company In-Three and its patent portfolio, which had been acquired by DDMG.

The lease on Digital Domain’s Venice headquarters expires next year and it will move to an as yet undetermined location on the West Side of Los Angeles, but the move is unrelated to the bankruptcy and sale.

DDMG’s bankruptcy filing said that as of June 30 it had total balance sheet assets of about $205 million and liabilities of $214 million.

Last Friday Digital Domain Media CEO John Textor resigned after the company had defaulted on some loan covenants and was trying to work out a sale or refinancing. It also announced the closing of facilities in Port St. Lucie, Florida where about 300 employees would be let go.

In his resignation letter, Textor condemned the new DDMG management for closing the facilities and laying off those employees. His emotional reaction is unsurprising, since the new management has completely repudiated his strategy for the company.

Textor led the purchase of DD by Wyndcrest Holdings in 2006. (Wyndcrest renamed itself Digital Domain Media Group.) Textor built a new campus for DDMG in Port St. Lucie, Florida, including an animation studio modelled after Pixar, Tradition Studios. DDMG also acquired 3D conversion pioneer In-Three and moved it to Florida, and launched an educational initiative with Florida State U., the Digital Domain Institute.

Under Textor, DDMG’s plan had been to pursue military simulation and training contracts and government subsidies. It accepted subsidies from the State of Florida and City of Port St. Lucie totaling a reported $130 million. Those governments will presumably be among the creditors seeking repayment during bankruptcy.

Florida governor Rick Scott’s office announced Monday there would be a state investigation into the $20 million DDMG subsidy, which was approved under Scott’s predecessor, Charlie Crist.