Digital effects firm’s IPO plan fails to excite

Digital Domain, a leading visual effects company that tried to go public this week, is now weighing alternatives after a tepid response from public investors.

The Venice-based firm, partly owned by director Michael Bay and best known for creating digital effects for such movies as “Transformers” and “Titanic,” was expected to begin selling 6 million shares in an effort to raise about $70 million.

But the planned offering didn’t inspire prospective investors, at least those prepared to pay the proposed price of $12 to $14 a share. Among their concerns is Digital Domain’s plan to expand into risky movie and video game production as well as broader market volatility.

“One of the big questions for investors is: Why is this a hot IPO?” said Anthony Valencia, an analyst at institutional investor TCW Group in Los Angeles. “They are going into a new business where they don’t have a track record.” He added, “Hollywood doesn’t have a very good reputation with Wall Street investors. . . . It appears they were unable to sell the deal at the price they wanted.”

The company stated in a recent filing with the Securities and Exchange Commission that it would use the proceeds from a public offering to pay down debt and transform the company from a work-for-hire commercial and movie effects house into a full-fledged production studio with its own pipeline of computer-animated movies and video games.

Digital Domain executives initially told investors they hoped to go public this week.

But on Friday, co-Chairman John Textor said the company might scrap the IPO and stay private.

“We are positively surprised by the interest from private equity sources,” Textor said. “The real reason this isn’t happening is because we have better opportunities. We received offers that will provide more capital than we originally sought.”

Unlike the technology sector, with its surfeit of hot stock offerings, Hollywood IPOs are relatively infrequent and have a mixed record.

Last year, for example, AMC Entertainment Inc. pulled its planned $789-million initial public offering after investors balked at the company’s asking price. The theater chain later announced a scaled-back offering, which still has yet to occur.

Digital Domain seeks to follow the path blazed by Pixar Animation Studios, which also began as a technology and digital effects company before branching out to make animated movies. Pixar’s 1995 IPO generated a frenzy on Wall Street, coming on the heels of its blockbuster film “Toy Story.” Shares of the animation firm opened at $47 a share, more than double their offering price of $22. (Pixar is now owned by Walt Disney Co.)

DreamWorks Animation SKG Inc. also scored a hit with its IPO in 2004. Riding on the success of its “Shrek” films, the studio saw its shares soar 38% on their first day of trading, raising $812 million for the Glendale-based company. Its shares later tumbled as the company missed its DVD sales targets. The stock has recently been trading between $23 and $26 a share.

Unlike DreamWorks or Pixar, however, Digital Domain has no track record of producing animated movies or video games. In its SEC filing, the company said it had an agreement with Warner Bros. to produce an animated movie and game based on the 1980s television series “Thundercats,” but it also said there was no guarantee the project would happen.

The filing also said that Bay, who is developing a video game for the company, had no contractual obligation to use Digital Domain for the visual effects for his films.

Co-founded 15 years ago by “Titanic” director James Cameron, Digital Domain was acquired in May 2006 for $35 million by a group of investors led by Bay, the company’s co-chairman. A new management team has invested heavily in hiring employees, upgrading equipment and acquiring a software firm. In 2007, the company posted a $20-million loss on revenue of about $79 million, according to its SEC filing.

Digital Domain and other visual effects houses have been squeezed in recent years by competitors in Europe and Asia that are able to produce effects for a fraction of the cost, as well as studios’ demands to produce splashier effects for less cost.

“All the visual effects companies are feeling extraordinary pressure to cut prices,” said Eric Roth, executive director of the Los-Angeles based Visual Effects Society. “It’s a stressful time.”

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richard.verrier@latimes.com