Buyout plan for Hong Kong's Digital Domain shelved as stock price nosedives

A proposed management buyout at Digital Domain Holdings, which runs the world's biggest independent visual effects company, has been cancelled, the company said.

Zhou Jian, the company's former chairman and largest shareholder, and incumbent chairman Daniel Seah agreed to terminate a memorandum of understanding they entered into last month.

"The board of directors of the company believes that the termination of the MOU will not have [any] material adverse impact on business operations," Seah said in a regulatory filing on Wednesday. 

"The company will continue to explore its potential business developments and maximise its value to shareholders."

Seah represented a bid by senior management to buy 25 per cent of Zhou's stake in the company for an estimated HK$3.97 billion, in what would have been one of the biggest management buyouts in Hong Kong.

That amount was based on a price of HK$1.616 per share, a 14.04 per cent reduction from the stock’s closing price of HK$1.88 on May 14. 

Since that date, Digital Domain’s share price has plummeted, amid reports early this month that Chinese businessman Che Feng was arrested in China by anti-graft authorities. 

Che, the son-in-law of former People's Bank of China governor Dai Xiaolong, owns a large number of the company's convertible bonds.

He and an unidentified partner have reportedly shored up HK$392 million of the bonds, which can be swapped for nearly 50 per cent of Digital Domain's enlarged capital base.

Seah could not be reached for comment on Thursday.

Digital Domain saw its share price fall 6.90 per cent to finish at 54 Hong Kong cents on Thursday, its lowest close since it hit 47 cents on April 15. 

The stock reached a record high HK$2.75 on May 19, just days after the announcement of the proposed management buyout.

Formerly known as Sun Innovation Holdings, Digital Domain continues to run a scrap metal trading business and owns various commercial properties and car parks in Hong Kong. 

In July 2013, it bought 70 per cent of Los Angeles-based Digital Domain 3.0, and later changed its Hong Kong-listed name to Digital Domain.

Reliance MediaWorks, part of Indian conglomerate Reliance Group, controls about 30 per cent of the visual effects house that was co-founded by Avatar director James Cameron in 1993. 

The proposed management buyout was expected to help drive Digital Domain's expansion into the virtual reality content business, as well as its transformation into a fully fledged technology company.

The company, which posted revenue of HK$850 million last year, was nominated for "Best Visual Effects" at the 87th Academy Awards for its work on the superhero movie X-Men: Days of Future Past. This was one of the world's highest-grossing films of 2014.

The original Digital Domain, which Cameron co-founded with media executive Scott Ross and special make-up effects creator Stan Winston, earned its first Oscar for the ground breaking visual effects seen in the 1997 film Titanic.

The company recently formed a joint venture with Canadian virtual reality company Immersive Media, which provides 360 degree, look everywhere full motion interactive video with its high resolution digital cameras.

"Immersive Media [provided] the driving technology behind Google Street View and hosted the world's first [online] streaming live concert utilising its imLive system," Guosen Securities analyst Max Gan said in a report. 

"We believe the market potential of virtual reality is huge, including but not limited to education, gaming architecture and military applications."

Mark Po, an analyst at China Galaxy International, said in a research note that "there is no listed company comparable [to Digital Domain] in Hong Kong".