Rhythm & Hues Bidder: ‘I Won’t Liquidate’ (EXCLUSIVE)

South Korea's JS received approval Friday to bid on bankrupt visual effects firm

Rhythm & Hues Bidder: 'I Won't

The head of the South Korean firm looking to snap up Rhythm & Hues revealed in an exclusive interview Sunday with Variety that he intends to keep the company going.

David Shim is managing partner of JS Communications, which got approval from the courts Friday for a “stalking horse” bid for the bankrupt visual effects firm.

“I have no intention to liquidate,” he told Variety. “Far from it. Rhythm & Hues should be taken care of. It’s in the common interest of the motion picture industry to support it for its skillset and what it can do for the industry going forward.

Shim said R&H’s problems were “the fault of the industry as a whole” but he added that the company’s financial management had been “a little lacking.” He has been onsite regularly at R&H’s offices and JSC appears to be the company’s preferred buyer in the upcoming bankruptcy auction.

“It’s a tragedy that a company of this quality, winning an Oscar just a few weeks back (for “Life of Pi”), is in bankruptcy,” said Shim. “Something’s wrong there. If you are that good and you are bankrupt, that just doesn’t make sense.”

JS is a privately held South Korean company with very deep pockets that deliberately keeps a low profile. Shim called it “a diversified multi-tiered media and entertainment firm,” whose efforts span movie production, movie financing and broadcasting.

“But it’s been confined to Korean and Asian operations,” he said. “I intend to broaden it.”

The company’s principals are Shim and CEO Jae Hwan Lee. Shim was a founder, managing director & CEO of CJ Entertainment, one of Korea’s biggest entertainment companies, and was a Warner Music Korea and EMI executive. He was involved in CJ’s original investment in DreamWorks SKG in the mid 1990s. Hwan Lee is grandson of the founder of Samsung Group.

Shim said he came to Hollywood last year to invest. “Since the economic and financial market meltdown of 2007 and 2008, the landscape has changed drastically and everybody is scrambling for money. I wanted to see what I could do to support that.”

He has had talks with Universal and Paramount, and that search eventually led to his efforts to rescue Rhythm & Hues. Shim credited Universal and Fox with being “very very supportive and very, very helpful” in those efforts.

JSC may not succeed in acquiring R&H at auction, but should they do so it would fit an emerging trend: the shift of visual effects ownership and production to Asia.

The only other major vfx firm to go through Chapter 11 bankruptcy, Digital Domain, received a $15 million stalking horse bid from an American investment firm that did not win the auction. DD was acquired by Chinese firm Galloping Horse and Indian firm Reliance for a total of $30.2 million.

Separately, Reliance acquired Burbank-based Lowry Digital, a small but highly regarded vfx and post firm, and changed its name to Reliance Mediaworks. Prime Focus of India acquired Frantic Films and Post Logic of Hollywood and they became part of Prime Focus North America.

While much attention has been focused on tax incentives and how they’ve lured vfx work to the U.K., Australia and Canada, labor is the largest cost in digital visual effects, and vfx production has been migrating to low labor-cost areas. The list of countries in Eastern Europe, South Asia and East Asia where labor-intensive vfx work for studio tentpoles has been done over the last few years includes Bulgaria, Nepal and Vietnam.

Rhythm & Hues already has two facilities in India, one in Malaysia and another in Taiwan. Those locations are not technically part of the bankruptcy auction, as they’re owned by distinct corporations — but those corporations are owned by the same owners as R&H. “At this time there is no plan to change anything about those facilities once we come out of bankruptcy,” said R&H principal Lee Berger.

Court filings indicate that more of R&H’s work will be done at those Asian facilities. R&H founder John Hughes warned employees last week that the company’s El Segundo, Calif. headquarters would likely reduce staff.

Peter Fishman of investment bank Houlihan Lokey, which is handling the sale of R&H, told Variety the Korean firm’s bid would assume the $16 million in loans from Fox and Universal and put another $1 million into the company. Those loans have kept the doors open at R&H during bankruptcy. Should it succeed in acquiring R&H, JS intends to put more funds in as working capital, not shut the company down or liquidate it.

The stalking horse bid sets the floor for future bids and ensures there is a buyer even if no other bidders enter the auction. Houlihan Lokey says it has received 20 NDAs from parties interested in bidding, and it expects about 10 to do on-site due diligence. JSC will submit the “Asset Purchase Agreement” for its bid by March 19, while other bids must be submitted by March 22.

JS appears to be R&H’s preferred buyer, as R&H’s management and lawyers pushed for terms that would tilt the upcoming bankruptcy auction for R&H slightly toward the Korean firm. Originally, the stalking horse bidder was slated to receive a $150,000 “Break-up Fee” should its bid fail, but JS insisted on a larger fee, which would discourage other bidders. It asked for $675,000 but the court approved $425,000. JS accepted that figure, which is still large enough to discourage other bidders.

The bankruptcy court approved the JSC bid even as a group of unsecured creditors complained bitterly that the R&H management, Fox and Universal had stacked the process against them.

The Unsecured Creditors Committee, comprising Warner Bros., investment bank Focal Point Partners and the class-action lawsuit by laid-off R&H workers, filed a scathing brief with the court Thursday night in which they attacked R&H principals, Fox and Universal for even keeping R&H’s doors open. They argued that it would have been fairer to them if the company had simply closed its doors and liquidated, rather than completing work on Fox and Universal movies currently in production there.

Warner Bros., New Line and 300 Pictures are major unsecured creditors in the R&H bankruptcy, and their listed claims total around $5 million. Warner opposed an R&H bankruptcy throughout the company’s financial crisis and pulled its vfx work from R&H once bankruptcy was declared. Lionsgate also pulled its work for the next “Hunger Games” picture.

The Unsecured Creditors filing argued that because Fox and Universal made a loan to R&H to keep work going, “Their projects will be completed, and then they will be at the front of the line to be repaid.”

“The Debtor (i.e., Rhythm & Hues) is not a going concern,” said the filing. “Rather, the Debtor has committed to wind down its business and is only working for the purpose of completing existing projects with Fox and Universal.”

The report also complains bitterly about the sale of R&H’s El Segundo HQ. The principals of R&H took out a $14 million loan from the company to finance the purchase of the building. Those notes would be a major asset in the sale but were used as security for the loan from Fox and U.

Unsecured creditors with smaller claims, including artists not covered by the class-action suit, are not represented by the committee.

The auction for R&H will be held the morning of March 27, followed by a court hearing the next afternoon to confirm the results of the auction. If all goes as planned, the sale would be concluded by March 29.

The court also issued an order preventing shutoff of utilities during the bankruptcy and authorized R&H to pay “in its discretion” back wages due John Hughes, Keith Goldfarb and Prashant Buyyala from before the bankruptcy filing.

Rhythm & Hues created the CG animals for “Life of Pi” and is famous for its expertise in creating digital characters, especially animals. Prior to this bankruptcy, it was known for its egalitarian management and its artist-friendly atmosphere. However it has already laid off more than 200 staffers following the bankruptcy and many are unlikely to recover the full amounts they’ve claimed for wages and benefits.