In a move that raised questions among some industry analysts, the nation’s two largest creators of motion-simulator attractions, Iwerks Entertainment and Showscan Entertainment, last week announced plans to merge.
Together, they will become the world’s largest provider of software and ride simulators capsules in which the audience moves in sync with a movie with more than 160 simulation theatres worldwide and a library of 67 films used in the rides.
Analysts seemed less than thrilled with the merger plan.
“I do think this deal has some merits, like expanding (Iwerks’) base of recurring revenue and bringing in a couple of primo simulation theater sites owned by Showscan,” said Kevin Skislock, director of investment research at L.H. Friend, Weinress, Frankson & Presson. “But I really do believe the negatives far outweigh the positives.”
The big negative, said Skislock, is that Showscan’s machinery is “terrible.”
“I would rather see Iwerks buy a company with only five sites, but all cutting-edge technology sites,” said Skislock. “I think that (Iwerks) management is measuring this deal with the wrong yardstick. They’re trying to measure market dominance based on the number of theaters or number of films they own. The way you measure it is by technology.”
Wall Street apparently agrees with Skislock; on Aug. 5, the day the deal was announced, Iwerks shares closed at $4.31, down 56 cents from its previous close. Showscan, however, rose 25 cents to close at $2.94.
William Battison, executive vice president at Iwerks, says analysts “don’t understand this business or the complexity of the out-of-home entertainment business.”
While Battison admits that Showscan is having a bumpy ride on Wall Street, he said the attractions and technology it will bring to Iwerks come at a relatively low price.
Under the terms of the deal, each share of Showscan common stock will be converted to .85 of a share of Iwerks common. Iwerks expects to issue about 5.6 million shares, resulting in a transaction value of $27.4 million based on Iwerks’ share price before the merger.
For that $27.4 million, Iwerks is getting a network of attractions that would take it about five years, plus the expenditure of many millions, to build, Battison said.
“Showscan has a very attractive network for us,” said Battison. “We can increase the value of the films (because each film can be shown in more attractions), so we can get money back faster. If you were Steven Spielberg, would you want to see your movie in 6,000 screens or 200 screens?”
Culver-City based Showscan owns 70 motion simulation theaters around the world, including 26 in Asia, and also has an equity interest in simulation theaters located at L.A.’s Universal Citywalk and London’s Trocadero.
The merger will also give Iwerks a bigger bite of the large-format theater arena, which is currently dominated by Imax Corp. Iwerks has been aggressively attempting to make a mark in big-screen theaters, and the merger with Showscan will add six more to the 70 already owned by Iwerks.
“We are extremely dedicated to growing our large-screen theater business,” said Battison.
Archrivals Iwerks and Imax are currently in litigation, with Iwerks accusing Imax in a federal antitrust lawsuit of stifling competition.
Showscan settled an antitrust lawsuit against Imax last May, according to W. Tucker Lemon, senior vice president and general counsel at Showscan.
Representatives at Imax could not be reached for comment.
“If I were Imax management looking at one struggling competitor buy another struggling competitor, I’d be smiling,” said Skislock.
It’s unclear what the merger will mean for employees at the two companies Iwerks has more than 175, while Showscan has 41 but layoffs seem likely. Lemon said the companies are anticipating “a consolidation of services and cuts in overhead will be made.”
