NEWS
Troubled visual-effects company Rhythm & Hues gets $20 million Studio Infusion

By Brent Lang and Sharon Waxman

LOS ANGELES (TheWrap.com) - Rhythm & Hues Studios, the Oscar-nominated visual-effects company behind "Life of Pi," is in dire financial straits and will take an emergency $20 million capital infusion from three major Hollywood studios in order to keep its doors open through April, three individuals with knowledge of the situation told TheWrap.

After April, the company is expected to be sold to an Indian company, Prime Focus, two of those individuals said. If Rhythm & Hues, which employs roughly 1,400 people, cannot find a buyer and is forced to close, it would be the latest blow to a struggling visual-effects industry, hit hard by the vagaries of tax credits offered by governments around the world.

According to two knowledgeable individuals, the company hit an unexpected cash crunch when movies it expected to work on were delayed.

Universal, Twentieth Century Fox and Warner Bros. have stepped in to float cash to the company so it can finish up work on a half-dozen major projects, including the Warner disaster film "Category 6," Fox's "Percy Jackson" sequel and Universal's "R.I.P.D.," the individuals said.

Spokespeople for the three studios declined to comment.

"Rhythm & Hues is not going out of business in April, and we are continuing to bid for new work," Lee Berger, president of the company's feature film division, told TheWrap. "We are a sustainable entity. In terms of financial difficulties, we are in the visual effects business, and we are always seeking outside investment. Much of the rest of the stuff is inaccurate and incorrect."

When asked to confirm or deny that Rhythm & Hues was having financial difficulties, Berger would only say, "I think I've been clear that I've said everything that I can say at this time."

One knowledgeable insider said Prime Focus already has a deal in place to buy Rhythm & Hues, with any credit left from the work being done this spring rolling over to the new owner.

"We're going to run into overages on our contracts, which will help Rhythm & Hues through a cash flow crunch," the individual said. "The overages will be credit with Prime, assuming they own the company."

The cash infusion is being structured as a "bridge loan," another knowledgeable individual said, until the company can secure new ownership.

There is also a Chinese company that is interested in buying Rhythm & Hues if the deal with Prime Focus fails, one individual with knowledge of the possible deal said.

A spokeswoman for Prime Focus did not immediately respond to request for comment.

The company's cash crunch comes as it received two Academy Award nominations for Achievement in Visual Effects for "Life of Pi" and "Snow White and the Huntsman." It is widely expected to earn the statue for its effects on "Pi."

It has previously won Oscars for 2007's "The Golden Compass" and 1995's "Babe."

The Los Angeles-based company has been acclaimed for the quality of its effects but has had trouble competing with generous tax subsidies that have sent much visual-effects work in cities like London and Montreal.

Chris DeFaria, executive vice president for digital production at Warner Bros., agreed that the crisis at Rhythm & Hues is symptomatic of turmoil that technology and tax credits has wrought in the industry.

"All the industry is having a difficult time adjusting to a rapidly changing landscape for visual effects," DeFaria told TheWrap. "It's unbelievable how fast things are changing. On one hand, governments are stepping up with various incentives. On the other hand, increased decentralization of artistry and technology is happening. Guys in garages can do an awful lot. We're doing far more of our work in small groups, in-house."

Rhythm & Hues has tried to keep up with this change, opening a branch in Vancouver, which offers subsidies, in an effort to lure filmmakers looking to economize. But it has been unable to compete with other players in the space who are able to underbid the company.

Rhythm & Hues also has branches in Mumbai and Hyderabad, India; Kuala Lumpur, Malaysia, and Kaohsiung, Taiwan.

Another issue for Rhythm & Hues is that the visual-effects business is an increasingly low margin one, the individuals say. One canceled or delayed project can make it nearly impossible for an effects house to meet its payroll.

Should Rhythm & Hues falter, it will join a list of more than a half-dozen effects houses that have been forced to shut their doors because of increased global competition. Among the companies that have closed down in recent years are Asylum Visual Effects, CafeFX and Illusion Effects.

Others have bowed to financial pressures and put themselves up for sale, such as Digital Domain, which was acquired by Galloping Horse America and Reliance Mediaworks for $30.2 million last September. It had filed for bankruptcy protections by that time.

Figures in the visual-effects industry said they were saddened to hear that Rhythm & Hues might be sold or could close, even as they hailed company founder John Hughes as a giant in the visual effects industry.

"I'd be very sad if it happened," Robert Coleman, president of Digital Artists Agency, a visual-effects talent agency, said. "If in fact the people at Rhythm & Hues see this as a way to save the company - if John feels this is what he feels he has to do, then he's entitled to it, because he's been such a beacon in the visual effects industry over the last 25 years. I just hope that the company can be maintained."

In October, Rhythm & Hues said it was looking for new capital and was willing to sell a minority stake to attract about $20 million in new investment.

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