Eros-STX merger: A cross-border match with global ambitions

It’s been a while that entertainment consumption over video streaming OTT (over-the-top) apps from the comfort of one’s TV at home, or smartphone screen on the move, has become a thing. So much so that, a diverse plethora of apps—homegrown and international—is vying for viewers’ attention and wallet share, leading to a crowded market. Netflix, Disney Hotstar, Amazon Prime Video and Zee5 are some of the names that come to mind easily. But there are several others like Hungama Play, Voot, Sony LIV, MX Player, Eros Now and others that are out there as well.

Since OTT apps are mostly subscription-driven and ask users to pay for premium, ad-free content, the question is whether all these apps will continue to survive and thrive in the long run. The names mentioned above are all backed by some serious capital, committed by global tech companies or media powerhouses. But it isn’t capital that’s most important here. It is the ability to acquire or produce copious amounts of content through the year to cater to the widest possible cross-section of viewers and retain them over a period of time. That’s easier said than done. While larger media conglomerates like Disney-Star and Zee Entertainment Enterprises Ltd can cross-utilise content meant for their other arms like television broadcast, live sports and film production to increase marginal utility. It is the standalone players that have to burn massive cash in producing cutting-edge content and monetise it well to earn a decent return on investment. Again, easier said than done, as even the mighty Netflix would vouch.

So what does a standalone OTT player do to remain competent in a race that has no dearth of runners? Eros International’s recent deal with STX Entertainment—a merger wherein Hollywood meets Bollywood—may provide an answer. At a time when the Covid-19 global pandemic is forcing people to stay indoors and consume content on their smartphones and TV screens, the creation of a media company that has a strong content pipeline on one end and an established digital streaming platform with subscribers on the other appears to make sense. For Eros, the deal brings a steady stream of Hollywood content usable on Eros Now, which was lacking high quality English-language content thus far. For STX, it gets access to an OTT platform that can serve as an alternate distribution channel for its films at a time when the future of theatrical film exhibition is uncertain, at least for the next couple of years. The fear is that patrons might choose to stay away from crowded theatres owing to health concerns.

Eros International (which is Eros Now’s ultimate parent company, via a subsidiary listed in India) is a NYSE-listed entertainment company that acquires, co-produces and distributes Indian content across languages and formats such as cinema, television and digital new media. It has also distributed blockbuster Bollywood films like Bajrangi Bhaijaan and Andhadhun in global markets including China and Japan.

The company, led by media entrepreneur Kishore Lulla, will be merging with STX, an independent Hollywood studio founded in 2014, which has produced films like the Jennifer Lopez-starrer Hustlers and Matthew McConaughey-starrer The Gentlemen. In an all-stock deal, the two companies will be merging to form what will be known as Eros STX Global Corp (which will continued to be listed on the NYSE) with Eros and STX holding 38% each in the company. Of the remaining 24%, around 15% will be held by existing and new investors in the company, private equity firms including TPG, Hony Capital and Liberty Global. These investors will be pumping in fresh equity to the tune of $125 million. The balance 9% will be held in a management equity pool.

“We are thrilled to join with STX Entertainment as this represents a landmark step in our company’s transformation. We are already at an inflection point as we move to a more consistent, stable and high growth revenue profile with our digital OTT platform,” says Lulla, executive chairman and chief executive officer of Eros International. “This merger will not only fuel our growth but will also diversify our underlying sources of revenue and subscribers with a truly global play, building a powerhouse between East and West.”

According to the statement issued by both companies announcing the deal, the amalgamation of the two companies will lead to a robust balance sheet that will allow the acquisition and production of Hollywood and Bollywood content at scale and across platforms. Apart from the $125 million in incremental equity, the company will also enjoy a $350 million credit facility from a consortium of lenders led by JP Morgan. The pro-forma revenue for the combined entity in calendar year 2019 stood at $600 million, with “over $300 million of highly-predictable aggregate future revenue from STX Entertainment films already released through 2019”. The integration will also result in operational synergies to the tune of $50 million; and the combined pro-forma balance sheet will have a cash balance of $195 million and net debt of $264 million.

The merger, which is expected to close in six to eight weeks after securing necessary approvals from regulators in the U.S. and India, will lead to the creation of a company with “a great deal of complementary synergies”, says Pradeep Dwivedi, chief executive officer of Eros International Media Ltd, Eros’s listed Indian subsidiary. “Around 20-25% of the content that Eros STX Global will produce would be Indo-US collaborations, which will tap the best of available talent in terms of actors, directors, VFX artistes in both the countries to create content with global appeal,” Dwivedi told Fortune India.

The Eros-STX combine will also be able to target the burgeoning market for media and entertainment in China better due to STX’s existing relationships in the Chinese market as well as Eros distribution expertise in the country. STX counts Hong Kong-based telecom company PCCW and Chinese Internet and technology investor Tencent are existing investors in STX, which gives the company an edge in the burgeoning media and entertainment market in China. Apart from this, STX also has partnerships with behemoths like Alibaba. The Foreigner, a film starring Jackie Chan and Pierce Brosnan, is an example of a US-China co-production that STX—which has released 34 films grossing over $1.5 billion in global box office receipts—was involved in.

With STX having a foothold in China and Eros having distribution tie-ups with partner such as the China Film Group Corp and Shanghai Film Group Corp, Eros STX Global will also look to co-create content exclusively for the Chinese market. The distribution of foreign language films in China is constrained by quotas decided by the administration for different countries. The Eros-STX combine will help the two companies maximise content monetisation in the Chinese market as movies—Hollywood or Bollywood—can be funneled into China either through the U.S. or India depending on quota availability for the specific countries at any given point in time. This means that the two companies, together, will be able to market more movies in China than they could separately, Dwivedi explained.

The liquidity available with Eros-STX Global will also allow it to innovate on new content formats. Dwivedi pointed out that several Hollywood studios had built their success on the back of long-running franchises. One such example is Disney’s Marvel Cinematic Universe, which has produced a series of blockbuster films—including The Avengers series, Iron Man series, and Captain America series—over the years. With access to greater capital and the VFX capabilities of a Hollywood studio, Eros STX Global would look to start a similar franchise of films, which re-imagine Indian mythology and bring epics like The Ramayana and the Mahabharata to life in novel ways.

All of this content that Eros STX Global creates for India, the U.S. and China will also lend itself to a strong digital play, across its own platform, Eros Now, as well as through partnerships with the other technology companies like Netflix, Apple, Amazon, Microsoft, YouTube and Hulu. The partnership with STX will further beef up Eros Now’s new offering Eros Now Prime—slated to be commercially launched soon—which also has content tie ups with other Hollywood mass media giants like Comcast’s NBCUniversal. According to the company, Eros Now has 188 million registered users, including 26 million paid subscribers.

How successful cross-border partnership will be remains to be seen, but investors’ initial reaction to the marriage has been positive. Apart from the fact that STX’s private equity investors see merit in infusing fresh equity into the new company, Eros’s market value has soared since the announcement of the deal. On April 17—the day the deal was announced—Eros International’s share price jumped almost 52% on the NYSE to close at $3.05; translating into a market cap gain of $137 million for the company in a single day.