Most people know that during this year's Coachella festival, Tupac made a surprising appearance, if not in the flesh for obvious reasons, then in hologram form. What fewer people know is that the firm that created Holo-Tupac is special effects producer Digital Domain Media, which after years of failed attempts to do so, finally went public in November with Roth Capital as underwriter (there is now an Urban Dictionary definition for 'Rothed') at a price of $8.50 (well below the preliminary range of $10-12/share) and at a time when its burn rate was well above 50% of revenues, and which filed for bankruptcy hours ago. In other words, the company destroyed over $400 million in market cap in under 10 months. What is known by very few is that this is yet another public equity disaster of this administration: as filed in the bankruptcy Affidavit, "the Company has worked closely with State and local government authorities in Florida to execute economic stimulus contracts designed to create jobs and stimulate Florida’s economy. As of the Petition Date, the Company had contracted to receive a total of approximately $135 million in such government stimulus financing, including $19.9 million in tax credits. This financing consists of cash grants, land grants, low-interest financing, and tax incentives." In other words, in addition to the government's remarkable track record in the alternative energy field, public equity is now in the digital movie studio subsidization business. End result: bankruptcy, of a publicly funded company, shortly after IPO and sadly the realization that US capital markets are now so broken that the combination of private and public funding can sustain a company for less than one year.
This is the stock chart of DDMG from IPO until today's bitter end (as a bonus we have also shown the chart of FB stock on the right axis):
But that's not the end of it.
Proving that the complete lifecycle of US corporations is now absolutely corrupt, not just the "birthing" segment, but the terminal one as well, is the attempt by private equity firm Searchlight Capital Partners to steal the only asset worth any money, in a carbon copy replica of what Barclays did with the Lehman Brother North America brokerage, which it stole for pennies on the dollar in the post bankruptcy scramble to find any buyer. As Reuters reports: "On Tuesday, Digital Domain said it had agreed to sell its production business -- the bulk of the company -- for $15 million to private equity fund Searchlight Capital Partners. A one-day auction is planned on September 21 to solicit competing bids, as required by the bankruptcy code.... Digital Domain said it needed to finalize the sale quickly, through the one-day auction, or Hollywood studios would cancel work from the firm. However, a bankruptcy attorney said a 10-day sale schedule was "incredibly short" and may make it difficult to find bidders as well as leave creditors little time to review the process. "The question here is whether the need for the sale to occur within 10 days is a legal emergency, created for the benefit of the purchaser," said Kenneth Rosen of Lowenstein Sandler."
Needless to say, the only reason for the stalking horse auction scramble is precisely "for the benefit of the purchaser", and is to prevent any other interested parties from performing real due diligence, and uncovering the true value of the "production business" that is being auctioned off: an asset which has had the benefit of tens of millions in taxpayer-funded sunk costs (which among other things built the film's Florida state of the art studio) and which incidentally happens to be the bulk of the company, only stripped of all the liabilities, which comrpised of at least $215 million in debt.
Who is Searchlight:
Searchlight, which manages about $860 million, was founded in 2010 by senior partners from investment management firms Kohlberg Kravis Roberts & Co, the Ontario Teachers' Pension Plan and Apollo Global Management LLC.
It's senior investment team:
Prior to co-founding Searchlight, Oliver was a Partner at Kohlberg Kravis Roberts & Co.L.P. ("KKR"), based in London. He helped build out KKR’s European operations, oversaw the communications and media industry efforts and played a leading role in a number of successful investments. Before joining KKR, Oliver worked for various firms in the investment industry in the US and Europe. Oliver graduated from Brown University with a dual BA degree in History and International Relations, and completed his MBA at the Harvard Business School.
Erol E. Uzumeri
Prior to co-founding Searchlight, Erol led the global private equity business of the Ontario Teachers' Pension Plan ("OTPP"), where he oversaw a large investment portfolio and a team of investment professionals with offices in Toronto, London and New York. Erol oversaw, led or was involved with a number of OTPP's most significant direct investments in North America and Europe and led the establishment of several newly-formed private equity firms. Before joining OTPP, Erol worked at CVC International and Citigroup in London, New York and Toronto. Erol received a BASc in Industrial Engineering from the University of Toronto, an MSc in Finance from London Business School and is a graduate of the Institute of Corporate Directors
Eric L. Zinterhofer
Prior to co-founding Searchlight, Eric was co-head of the media and telecommunications investment platform at Apollo Management, L.P. ("Apollo"). He was a leader in Apollo’s private equity/distressed debt-for-control effort and was involved in the initial hiring and building of its commodities investing platform. He played a key role at Apollo in initiating/leading investments in a range of cable, satellite, and wireless providers and operators in North America, Europe and India. Before joining Apollo, Eric held positions at Morgan Stanley and J.P. Morgan. Eric received a dual degree in Honors Economics and European History from the University of Pennsylvania, and completed his MBA at Harvard Business School.
In other words, by acquiring the core of the firm in bankruptcy for a measly $15 million, the PE firm will acquire assets worth tens of times that amount (assets listed in the bankruptcy filing were $205 million), but more importantly the implicit benefit of extensive taxpayer funded "improvements" including (from the Affidavit below) not one, not two, but three stimulus packages in the course of 3 years:
Over the past two years, the Company has worked closely with State and local government authorities in Florida to execute economic stimulus contracts designed to create jobs and stimulate Florida’s economy. As of the Petition Date, the Company had contracted to receive a total of approximately $135 million in such government stimulus financing, including $19.9 million in tax credits. This financing consists of cash grants, land grants, low-interest financing, and tax incentives. All of these incentives have been structured over a three- to five-year period, with portions of these grants to be funded as the Company meets target thresholds of business initiation, capital expenditures, and/or job creation.
The first stimulus package, signed in June 2009, provides for $20 million in cash grants from the State of Florida.
The second stimulus package was awarded to the Company by the City of Port St. Lucie, Florida in December 2009 and January 2010, and provides for: (i) an additional $10 million in cash grants; (ii) 15 acres of land appraised at $10.5 million; and (iii) $39.9 million in low-interest building and equipment lease financing. The Company used these incentives to construct its headquarters and state-of-the-art animated features film studio, Tradition Studios, in Port St. Lucie, Florida.
The third stimulus package, signed in November 2010 with the City of West Palm Beach, Florida Community Redevelopment Agency (the "Agency"), provides for: (i) grants of $10 million in cash; (ii) title to 2.4 acres of land appraised at $9.8 million; and (iii) $15 million in low-interest construction financing. These grants were designed to incentivize the Company to build DDI’s educational campus at a site in the City of West Palm Beach. The cash grant will be released as DDMG and DDI achieve various benchmarks, including commencement of construction, student enrollment targets, and other business progress targets. The deed on the granted property provides that it reverts to the Agency if certain conditions are not met or if construction of the site is not commenced by December 13, 2012. As of the Petition Date, the foregoing conditions have not been fulfilled, and construction has not commenced nor has financing for such construction been identified.
All of the money above is now lost, despite hopes by the state it will get its money back:
"If the company is not able to meet its contractual obligations there are clawback provisions for the state to seek its money back," said Stuart Doyle, spokesman for Enterprise Florida, a public-private partnership that was involved in negotiating the incentives for Digital Domain but later recommended against providing support to the company.
"We're looking at the company saying 'OK you're not going to meet these job requirements so we need to start talking about a repayment plan,'" Doyle said. "We would go aggressively after our investment."
Good luck Mr. Doyle. By the time the 363 Auction is complete, any possibility for recoupment will be long gone, as will be your political career once your electorate realizes how you have burned tens of millions in tax funding in a dead end venture.
We will leave the open question of whether Roth Capital misrepresented the facts of the business in the IPO prospectus to other, more litigiously inclined readers. We are confident that with a bankruptcy 10 months following the IPO this question will get its answer soon.
Our advice to any readers with $15 million burning a hole in their back pocket: forget the lengthy diligence process, and engage in a bidding war with Searchlight on the 21st. Worst case scenario - the salvage value of the assets in a liquidation will be orders of magnitude above the purchase price. How can they not be: after all public capital was "prudently" invested into this venture.
Full affidavit from the bankruptcy docket (case is 12-12568 in Delaware Bankruptcy Court).