Many an actor from the golden age of Hollywood was brought to life in Technicolor. The pioneer of colour film will again stand alone as a spin-off, Technicolor Creative Studios. Glowing market reviews are unlikely.
This deal is part of a long-running restructuring plan to separate TCS from the larger Technicolor. Before the spin-off, Technicolor’s share price had lost 93 per cent over the previous five years.
TCS produces special effects for television, film and games. This will split from the rump business, renamed Vantiva, a maker of set-top boxes and broadband routers. Separately listed Vantiva will retain a chunk of TCS shares.
The logic for the split, which will hand 65 per cent of TCS to shareholders, is made clear from half-year results. Revenues at TCS grew at 38 per cent and achieved ebitda margins of 15 per cent. Vantiva expanded at just 13 per cent, with half that profitability.
An eventual re-rating for the new shares would make a nice bonus but restructuring €1.3bn of group debts is at the core of the transaction. The first step to reducing this pile was to raise equity from shareholders via the issuance of €300mn in mandatory convertible notes. These converted last week.
After Tuesday’s moves TCS had an enterprise value of €1.4bn, 10 times this year’s expected ebitda. TCS will carry more of the net debt at €623mn — about five times expected ebitda. This faster-growing business hopes to cut its liabilities as free cash flow rises higher than €100mn annually by 2023.
Do not expect a box office smash soon. Even if TCS does deliver on its forecasts, a share overhang may be a problem. Slower growing Vantiva has plans to dispose of its 35 per cent holding in TCS to shrink its remaining debts of €375mn.
For long-suffering shareholders and creditors of Technicolor, this restructuring brings a minor blessing. Other investors should avoid buying tickets to this show.
Our popular newsletter for premium subscribers is published twice weekly. On Wednesday we analyse a hot topic from a world financial centre. On Friday we dissect the week’s big themes. Please sign up here.