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3 March 2022

VFX boom triggers Technicolor separation strategy

Technicolor is the latest video technology vendor to split in two, revealing plans late last week to spin-off its Technicolor Creative Studios (TCS) division, which provides cutting edge VFX technologies. The main French business (referred to in the announcement as Ex-TCS) will hold 35% ownership in the newly spun-off TCS.

The announcement coincides with similar but distinct fledgling plans from TiVo parent company Xperi to divorce its product and licensing units into standalone businesses (see separate story in this issue).

Technicolor’s separation strategy – as with most – is one geared towards simplification and deleveraging of operations to enable the two independent organizations to have more active development profiles, through a huge debt structure overhaul, amid a period of intense pressure from investors. It is also evidence of a turn of events from Technicolor – which finds itself already €287 million ($318 million) of the way towards its three-year run rate cost savings target of €325 million ($360 million) by the end of 2022.

Technicolor is on track to blitz that target, and can now boast running three profitable businesses after two years of tough restructuring.

The burgeoning demand for content is driving exponential growth for the TCS VFX business, according to the announcement. By spinning off TCS and instating a board and management team completely separated from Technicolor Ex-TCS, the new independent TCS will be able to execute growth strategies, or so the plan generally goes. Of course, they don’t always pan out that way.

By the same token, the separation should position the main Connected Home and DVD Services business of Technicolor Ex-TCS with a stronger and de-risked balance sheet.

The effort will be aided by a fresh injection of €100 million ($111 million) cash from the sale of Technicolor’s Trademark Licensing operations, a deal which is expected to complete in the first half of this year.

While Technicolor CEO Richard Moat credited the transformation of the group over the past three years, in which time the post-production business was sold and other cost saving measures taken, the company’s situation has been volatile for a long time. The latest move comes after Technicolor decided to dispose of its patent licensing business at the end of 2017, two years after spending $500 million in the landmark deal to acquire Cisco’s set top business.

In this time, the appointment of a new President in 2020, Christian Robertson, has proven crucial. Robertson will serve as CEO of the new entity, having spearheaded improved synergies, organization, efficiencies, and agility, says Technicolor, with TCS studios now integrated under dedicated business lines with MPC for Film & Episodic VFX, The Mill for Advertising, and Mikros for Animation and Technicolor Games.

Its independent future looks promising, with TCS serving fast-growing and evolving markets for streaming companies, filmmakers, brands, and the gaming industry. Given current trends, Technicolor couldn’t help but mention the metaverse in its spin-off press release, as a future target market.

TCS is already a hugely successful and well-established business. It made revenues of €629 million ($697 million) in 2021, up 22.5% year on year – driven chiefly by the ramp-up in production of major theatrical projects and an influx of contributions from all major streaming platforms.

Growth was also helped by a faster than expected recovery in advertising spend in 2021 on the back of the economic impact of Covid-19, while the TCS gaming studios saw significant revenue growth too.

In revenue terms, TCS still pales in comparison to Connected Home, which recorded revenues totaling €1.54 billion ($1.7 billion) for the full year 2021, but this segment is being squeezed, with revenues down 10% year on year. Technicolor blames sales volumes being severely impacted by the worldwide semiconductor crisis and other supply chain disruptions.

For 2022, Technicolor is targeting adjusted EBITDA of €185 million ($205 million) and growing to €215 million ($238 million) in 2023.

In comparison, Technicolor Ex-TCS – which is where the strong Android TV sector will remain – is targeting adjusted EBITDA of €160 million ($177 million) this year, forecasting a decline to €150 million ($166 million) in 2023.

With the spin-off expected to take place during the later part of Q3 2022, Technicolor retains that it may seek to dispose of its 35% share retainer in TCS following the spin-off, depending on market conditions.