Rs 30 Cr has been agreed as the value of the stake. What is not known is if it’s all cash or other conditions apply.
Disc: invested
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Judging price action on the back of this singular piece of news at a time when the entire market is going through a correction doesn’t seem wise.
Best to judge the news in isolation away from price.
For context: basilic is down 6% today itself.
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The acquisition seems to have significant strategic merit in favor of PhantomFX:
- Reputation: Tippett Studio carries a legendary reputation, particularly with Phil Tippett’s iconic contributions to stop-motion and CGI.
- Market Positioning: PhantomFX can position itself as more than just a technical support provider. Tippett Studio’s creative expertise and vision can help PhantomFX establish itself as a creative force on the international stage, potentially changing the perception of Indian VFX studios in the global market.
- Client Base: Access to Tippett Studio’s client base opens up new opportunities for PhantomFX to work on prestigious projects and build relationships with major players in the industry.
However, PhantomFX does not match Tippett Studio’s reputation and the acquisition seems somewhat undervalued [1]. So, why did Tippett Studio agree to this acquisition? Even if they wanted to exit due to personal reasons, why did they agree to by acquired by an anonymous VFX company instead of joining hands with more reputed studios? Do they expect major downturn in the industry which is hidden from PhantomFX?
[1] Valuation Note. PhantomFX expects 20-25% of their FY25 annual revenue growth to come from Tippett Studio. They are expecting a growth from ₹90-95cr in FY24 to ₹130-140cr in FY25, which puts the revenue expectation from Tippett Studio at ₹8cr, approx. $1m. They have 80% share, hence Tippett Studio FY25 annual revenue is estimated around $1.25m and the company is valued at $4.375m. Assuming 20% profit margin, PhantomFX paid a FY25 P/E of 17.5.
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Apologies for the double post, but I am struggling to find an acceptable answer to this question. With due respect to what PhantomFX is doing, the disparity in prestige and legacy between the two companies is striking, raising doubts about the logic behind the acquisition. Tippett Studio is one of the most prestigious boutique studios in Hollywood, operating exclusively at the highest end of the industry. It is obvious that they were struggling financially and possibly wanted new leadership. However, given their reputation, they would have garnered considerable interest from numerous other studios or boutique houses, making the decision to sell to PhantomFX puzzling. PhantomFX may provide a cheaper workforce to increase margin, but that does not justify selling the company because they could have simply outsourced some of their work without compromising independence. In any case, working under the leadership of a significantly less illustrious company risks diluting their brand and creative autonomy, an unfortunate outcome for such a distinguished entity.
From PhantomFX’s perspective, this may seem like an incredible opportunity, but the adage “if it’s too good to be true, it probably is” comes to mind. I am concerned that there must be something seriously wrong with Tippett Studio or they know something which we don’t e.g. major industry downturn. Acquisitions like this rarely end happily. In hindsight, I really wish that they had pursued a less prestigious acquisition target.
I am contemplating reducing or exiting my position in PhantomFX. Also, I am not a financial advisor.
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Backward and Forward Integration is possible in Industries. There are “N” number of reasons, but most important part of any acquisition is integration of business and manpower to adopt the whole thing and move forward. One of the small, listed player in stock market and another one giant name in Hollywood!!! Interesting Case study!!!
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The signing of the term sheet (assume there is an ongoing contractual negotiations before any formal acquisition) does present some questions / perhaps opportunities as well? I had additional thoughts (speculation) to add
a. The 20%-25% increase in revenues was confusing - I interpreted this as 20-25% on Rs 90-95 crs - so that would imply ¬Rs 20 crs (USD 2.4 mn) - as per the Q3 FY24 call the Rs 135 cr FY25 target included inorganic as well. The exact numbers / valuation multiple are not really critical - the main point is that Phantom is 4-5x larger than Tippett - so at least from a size perspective it is the much larger company buying the smaller one
b. Coming to reputation - without a doubt Tippett has a strong historical track record (winning an Oscar can’t be a bad thing!!). Speculation 1: However, I do see that their 2023 references are far fewer and not as impressive compared to previous years (official announcement https://youtu.be/YtKrGzzLeUg at 2:13) .
c. Speculation 2: Selling a 30 year old business for $4.375 mn would seem to imply something is not working. Combining the 2023 revenue size and track record (and the Hollywood strike?), perhaps Tippett is struggling (with any professional services company, employee cost is 50-60% of revenues and the hollywood strike was 5 months). Based on some scuttlebut, working for VFX companies in developed countries does not seem to be a desirable job (highly demanding clients - Marvel leads the pack, very long working hours -high pressure to turnaround, limited compensation upside - overtime is something being introduced). Could also explain the migration of work to India and the subsequent staff challenges here Phantom Digital Effects Limited - #236 by vikas_sinha
d. Speculation 3: Having a US reputed organisation (with the original brand) could be a way to ensure direct contracting of international work. Some additional scuttlebutt I had done on the VFX industry highlighted that one of the key challenges for more international work to be directly contracted by Indian VFX studios was confidentiality concerns. Since the VFX / Post production work needs to be done on the final rushes, there is a major concern to transfer the files to a new partner offsite in India (piracy and leakage concerns for multi-millions dollar movies is a big worry). This is where Teppitt could fit in (In addition to the point made by Gary Mundelll CEO Teppitt - that jointly they will be able to convince studios that India can do creative work as well - in addition to technical)
It would be very interesting to get management’s thoughts on this / perhaps there will be more details if and when the contract is finalised. Several questions still unanswered
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The term sheet is a bit low on details - e.g. revenues over the last 3 years is not provided
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Is there an option to buy out the remaining 20% and at what price?
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Magnitude of earn out for the management to have them stay on - and for what period (would this give enough of a runway for a new management team to build trust?)
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How will the 20% ownership affect the profitability of the business - assuming all US / Canada work is contracted through the Tippett entity, how does the transfer pricing work or is there a ‘20% tax’ on all revenues. E.g. they talk of hiring 250-300 employees across all geographies - India, Canada and US.
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What is the payment schedule and how will they fund this. Total acquisition cost for 80% is Rs 31 cr. I think they had about Rs 4.8 cr at Q2 FY24. There was still about Rs 13 cr Ayalaan outstanding + cash generated in Q3 and Q4. Seems like they might need some debt assuming this is an all cash deal or they might dilute further if there is stock (hopefully not given the current share price trajectory!!)?
In balance, it seems to me that this is a reasonable step to the North America geographic expansion (and depending on the final contract details - may even be an excellent one). Perhaps they will share more on the actual rationale (rather than me relying on my speculation) in the year end call.
Disc: Invested and continuing to build position size - so likely to be biased. Not financial advice and not a registered SEBI advisor
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They have recently raised capital from investor. They will use that money to fund this acquisition. So I do not see any immediate dilution again.
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Hey, has anyone researched that whether a listed VFX company, globally have made money for their investors? Especially in the USA?
Would love to discuss some thoughts on the same!
Dislaimer: Invested 
The Visual Effects-Game-Animation Society (VEGAS) has elected a new team with Bejoy Arputharaj as the President.
Apart from Bejoy, noted other people are Balakrishnan R (BasilicFly Founder and CEO) and Rajan E (PhantomFX Vice President) who are elected as Executive members
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Phamtom FX Digital. A brief look
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PhantomFX is an end to end creative studio…they work right from concept art to making 2D models and then to 3D models… adding texture, animation to the objects, creatures they create
To do these kind of projects you need to be involved right from story stage with inputs to Director, Producer and other technical crew…that is even before pre production and not many Indian VFX companies does this kind of work
These are some of the examples of the work they did for Ayalaan movie
https://twitter.com/phantomfx_india/status/1770098191288913987?t=cHtgITzvsm7QGNMw4nF-ow&s=19
https://twitter.com/phantomfx_india/status/1768262041230610899?t=d2n1WtQBE0Et2wUL71MRiQ&s=19
https://twitter.com/phantomfx_india/status/1766838649893880111?t=kSxUvzmWLvNKBj19roLT1g&s=19
https://twitter.com/phantomfx_india/status/1763611001264742566?t=nLuAHcrAVXXsNJIkwERo1Q&s=19
When it comes to Hollywood projects though PhantomFX has done many projects before, I guess their scope of work like any Indian VFX services company is confined only to the post production VFX work
The partnership with Tippett Studio will give them scope to do these kind of work for Hollywood studios …on the other hand Tippett can work for Jurassic Park kind of movies coming out of India
PS: Tippett in its LinkedIn post mentioned that, as part of PhantomFX partnership they will start hiring big across locations…this indicates that they have already started working together as partners and not waiting for acquisition to be completed
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Plausible that Indian firms flush with IPO/QIP funds are taking advantage of a liquidity crisis US/EU VFX studios are facing coupled with the issues related to writers strike etc, making them vulnerable acquisition targets
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“Visual Effects services undertaken in India for Foreign Productions can claim upto 30% of the Qualifying Expenses (75% of Contract Value) plus an additional bonus of 5% for Significant Indian Content subject to a maximum of INR 300 Million.”
Has anyone analyzed the benefit from these govt rebates and whether Phantom would be eligible for it. Doing just a back of the envelope calculations for FY24, Phantom Mgm’t has guided for a 140 Cr. Sales and assuming they are guiding for a mix of 55-60% from international, that would lead to around 70-80 Cr International revenue they might have 35-40 Cr costs relating to international projects, which may be eligible for rebate under this scheme. Even if we assume instead of max 30 Cr. available they are able to get a 20 Cr. kind of cash rebate of this amount, their Pat from international mix may go up to 40-45 Cr. Add to it domestic mix PAT of say 20-25% margin of 15-17.5 Cr, they might easily end up with a PAT of 55 - 62.5 and PAT Margin of around 40%. What am I missing here.
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Public shareholding continuously increasing and FII DII stake significantly reduced,
They were part of recent QIP and all of them reduced their stake or completely exited.
Wondering if a distribution likely happening here
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Looks like something is fishy on this disclosure, since all vfx companies are down 12-15% after this fantastic scheem
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Maybe all of the VFX companies are being classified in the same boat.
Phantom has declared strong results last quarter. Has shared couple of positive updates in the form of project wins, Awards recognition.
However, seems Market hasn’t taken cognisance of it.
In the recent past (eg Sept qtr), the result (aka progress) was inconsistent.
And the company hasn’t shown good Cashflows so far
(although that also to some extent has been due to 1 time project financing of Ayalaan movie & others)
Let’s see how the story unfolds.
Disc - Invested.
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One VFX company messes up with the results (basic_mistake_lic) and rectifies it few days later after damage is done. This one uses template from different company.
Hope their VFX work is not all about copy/paste (errors)
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Decent results if we look at YoY. With this it will now be available at a PE of around 22, why is the pessimism, is it because of the AI threat? Or has the impact of job cuts at DNEG has spooked the investors? Even Basillic Fly is available around 20 PE, seems like the market is not willing to give any premium to this whole sector.
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I think receivables are the main problem with these companies. They get the job done with big production houses but not get paid for many months as they are dependent on these production houses for vfx work. These production houses work on many projects simultaneously hence they provide work regularly to these companies but delay payment of previous work done. That’s why these companies are venturing into producing movies. Recently digikore also moved into production with jio. Phantom also have its own production house. One more point when the biggest vfx company of the world Dneg balance sheet is not good I don’t think so these companies will post good result. Sora is also a threat for them
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