Wētā Digital deal ‘terrible’ for buyer
Jackson lord of the cha-chings as stock analysts pan Unity purchase
As the dust settles on one of New Zealand’s biggest exits, the $2.2 billion deal for Wētā Digital is now described by stock analysts as “bananas” and “terrible” for purchaser Unity Technologies.
Unity’s reset and termination of service agreements late last year, just two years after the ink had dried, avoided a scourging of The Shire and left Sir Peter Jackson and other Wētā Digital shareholders with both the billions in sale proceeds as well as continued control of the lucrative Wellywood film empire.
Both the scale of the deal and the wildly divergent outcomes for buyer and seller are significant.
Wētā FX, with Jackson as majority shareholder and independent of Unity, was set up at the time of the deal to hive off bread-and-butter screen special-effects work said to generate more than $200 million in annual turnover. Five-sixths of Wētā’s 1500-strong workforce ported over to the new entity to allow for businessas-usual at the Miramar-based effects house.
At the Academy Awards last month, Wētā kept up its habit of basking in the limelight when its work on War is Over! secured a statuette for best animated short, while its contributions to Guardians of the Galaxy Vol. 3 landed a nomination for best visual effects.
The new entity secured full independence from Unity in December after paying $170m for a perpetual licence to software it had developed in-house and sold as the centrepiece of the 2021 deal.
It had previously been contractually obliged to make at least $70m in annual payments to Unity.
New York-based stock analyst Martin Yang, who tracks Unity for Oppenheimer & Co, said the final wash-up left the gaming software company wallowing in red ink.
“They sold a perpetual licence of all those rights to Wētā FX for a bit over US$100m [$170m]. Terrible dealmaking on Unity’s part, considering that they paid US$1.6b for Wētā Digital. Bananas indeed,” Yang said.
One film industry source familiar with Wētā’s operations said even inside the company, many were scratching their heads.
“It seems like Unity gave Peter a billion dollars, and then just walked away,” they said.
Requests this week by the Herald for comment to Jackson and Wētā FX went unanswered.
While Wētā has seemed to enjoy smooth sailing in the two years since the deal, Unity has struggled. Its share price has declined by more than 80 per cent (possibly hitting Jackson and his fellow Wētā shareholders in the back pocket as one-third of the 2021 purchase price was paid in company stock) and has had to weather a storm of consumer outrage over proposed user charges.
In early October, long-time chief executive John Riccitiello retired. Weeks later, Unity took the first steps to unwind the Wētā deal and a month later it shuttered the remnants of Wētā Digital. Wētā FX said at the time it would seek to re-employ the 265 staff laid off as a result.
In January, Unity announced it would be laying off a further 1800 staff, a quarter of its global workforce, as it struggled towards reporting its first profit since being founded two decades ago.
Yang said when the deal was struck Unity would commercialise Wētā’s software tools and make them available for its own users in game and metaverse development, but these plans did not seem to progress.
“It’s fair to say that the product vision was never realised and was not even close in terms of execution. The progress has been way slower than what management projected at the time of acquisition,” he said.
While Yang said the collapse of the deal was undoubtedly a loss for Unity — “I’ve definitely heard the word disaster mentioned” — both the purchase and the unwinding hadn’t triggered movements in its share price.
“An average investor or Unity shareholder wouldn’t understand how hard it can be to convert tools that have been long-established in film production workflow, [into] tools for video game production workflow,” he said.
Yang said Unity had recorded acquiring US$668m in intangible assets — Wētā’s software — as part of the deal, but had since written that down by US$200m and expected more impairments to follow.
“In reality, other than selling that perpetual licence to Wētā FX, I don’t think there’s an alternate way to monetise that asset,” he said.
By contrast, the deal with Unity capped a remarkable turnaround for Jackson, who has become a major player in Hollywood, Wellington and the Beehive.
After achieving worldwide fame and building a local film empire off the back of The Lord of the Rings and The Hobbit trilogies, and was an influential figure in helping convince successive governments to provide sector subsidies totalling hundreds of millions of dollars, the mogul had endured a relatively fallow period, largely spent producing niche projects and documentaries.
Prior to the Unity sale, Jackson had pulled back from extracurricular activities, including turning off funding taps for a legal challenge to Wellington’s Shelly Bay development, and in 2019 sought external capital for Wētā Digital — by far the largest operator in Wellywood — and sold a quarter of the company to Napster founder Sean Parker for $100m.
Parker, who saw his $100m investment turn into a $600m payday in just two years, retains a significant stake in Wētā FX.
Since the Unity deal, which secured Jackson and partner Dame Fran Walsh $1.4b and returned them to Forbes’ ranks of global billionaires, he was not only able to redouble opposition to the Shelly Bay development but had finance available to achieve total victory by buying the site outright. His real estate empire is now worth more than $350m.