Film Roman deal the saga continues

The animated suspense over the acquisition of the US-based Film Roman by the Chennai-based Pentamedia Graphics is finally over. The Indian entertainment graphics major is understood to have substantially modified its earlier agreement with Film Roman.

Says Mr. K. Srinivasan, director and chief operating officer, Pentamedia Graphics, "Under an entirely stock swap deal, Pentamedia Graphics will now acquire 49.946 per cent in Film Roman for $10 million. We will issue five million shares of $2 each to Film Roman."

"The stock market world over is not good and we have decided to conserve cash to take care of our future acquisitions and investments," he explains.

It may be recalled that Pentamedia Graphics initially agreed to acquire 51 per cent in Film Roman for $15 million for cash. Subsequently, in January 2001 when the share of Film Romans got delisted at the Nasdaq, Pentamedia Graphics revised the deal to acquire 60 per cent of the newly-issued common stock for the same price.

The agreement hit the rough patch when Pentamedia Graphics, instead of paying the sum by March 26, got an extension till April 13, which it again didn't adhere to. In the meantime, questions were raised as to whether the Chennai company was paying a high sum when Film Roman's scrip was changing hands at a much lower price (See a related story, Clearing the air – Pentamedia Graphics).

A couple of weeks ago, Film Roman, in its filing with the Securities Exchange Commission, (SEC), had stated that Pentamedia Graphics breached the Stock Purchase Agreement (SPA) signed on 31 January. It also said the company would take legal action for claiming damages.

According to Mr. Hyde, Pentamedia Graphics informed Film Roman in early March that it was considering alternatives to restructure the fixed payment under the SPA. This was apparently due to a drastic fall in the former's share price and the cancellation of its proposed GDR issue.

In an attempt to restructure the deal, Pentamedia Graphics made a series of proposals lowering the initial cash to be paid and extending the remainder of the cash payments into the future. Finally, Pentamedia Graphics indicated that it could not pay any cash and proposed to change the all-cash payment to a payment consisting entirely of its GDRs traded on the Luxembourg Exchange, with no guaranteed floor on the market value of the GDRs.

The board of directors of Film Roman rejected this offer as not in the best interests of its shareholders. Mr. Hyde reasoned that having just completed two of the best quarters since going public and having no debt and just under $3,000,000 in cash, there is no need for Film Roman to accept a highly volatile security in return for shares. The funds from Pentamedia Graphics were primarily for future expansions and not for day-to-day operations

The hawkish attitude of Film Roman was not viewed favourably by the US investors' market and the company's share was hammered down immediately.

And now the curtains are temporarily down as both the parties have entered into a new deal and are finalising the details. A business partnership is important for Film Roman as well as Pentamedia Graphics.

For Film Roman – whose expertise lies in 2D animation – a tie up with Pentamedia Graphics will give it a foothold in 3D animation. Further, Film Roman is also not in the special effects' segment, says Mr. Srinivasan. Secondly, with production costs mounting in the US, all major players are looking out for a partner in countries like Korea, China, Philippines, who are again good only at 2D works.

For Pentamedia Graphics, an equity deal with Film Roman will give it international presence. "The acquisition will make our overseas forays easier," reasons Mr. Srinivasan. That apart, the huge development facility created near Chennai will be used to execute at least 30 per cent of Film Roman's orders. "Film Roman has a target of closing this year with a turnover of $ 60 million," he adds.

Salvaging the deal has come as a big relief to Pentamedia Graphics, more so because some of its other acquisitions/investments have come under cloud on the grounds of high price paid to unknown entities – Improvision Corporation, Krish-Srikkanth Sports and Entertainment P Ltd., etc.

Meanwhile, Pentamedia Graphics' other alliances with some overseas companies have started bearing fruits. The company has got orders worth $ 1 million from Creek & River, Japan, and a $ 6 million order from Economic Development Board (EDB), Singapore. The later is for the production of a 90-minute animation movie based on life and teachings of Lord
Buddha.

After producing Pandavas – The Five Warriors, a 90-minute animation movie last year, Pentamedia Graphics has completed production of Alibaba to be screened next month.

"The film cost around $ 4 million and will be released both in US and India. Our estimates are that 30 per cent of $ 15 million revenue projected will come from theatre release and the remaining from home video, video rentals, DVDs etc.," adds Mr. Srinivasan. The company's other acquisition, Media Dreams, will be producing three feature films this year.

However, Num TV, the broadband portal, is yet to show significant revenues. The portal currently is the company's 'money drainer'. According to Mr. Srinivasan, the portal will be adding TV channels like Chinese, Korean, Taiwanese, etc., to its bouquet of offerings.

"Num TV has tied up with Level Three, a foreign ISP, and the portal will be distributed by the company. In addition, we have a tie up with British Telecom whereby the UK company's channels will also be part of Num TV," says Mr. Srinivasan. The portal today boasts of 50,000 subscribers and has been redesigned to be user friendly.

As regards the plans for the company's other divisions, work is on for the construction of second
dome at its theme park `Mayajaal'. A golf course, a cricket stadium, tennis courts are other just a few of the offerings that are being planned.

Similarly Pentamedia Graphics' incubated venture, Purple Drop Inc., is entering the gaming segment. The company has tied up with Sony for its Play Station games.

With more orders for computer animation, Pentamedia Graphics is building a 30,000-sq.ft development centre at Hyderabad that could house 200 employees. The centre is expected to be ready early next month.

Good order book position apart – $ 155 million to be executed in next 15 months – concerns are expressed about the $ 20 million outstanding from Pentasoft Technologies Ltd., a group company. Till date, Pentamedia Graphics has paid no interest nor anything has been provided for the same in its books. It is said that a major portion of the outstanding will be extinguished in a stock swap between the two companies.