STX, Eros See Combined Future in China and Premium VOD

By Naman Ramachandran

LOS ANGELES (Variety.com) – Bollywood distributor Eros International and Hollywood producer STX Entertainment’s newly announced merger could easily be viewed as a case of two unloved companies discovering common ground, wrapping their arms around each other and trying to make a fresh start.

But the unusual East-West pairing argues that there are sound creative and marketing reasons to combine forces. For one, the freshly titled Eros STX Global Corporation will look anew at China, where both companies have unfulfilled ambitions.

“We will combine our forces of distribution and creation, and partnerships that both the organizations have, and look at China afresh, not just from a distribution or a market perspective, but also as a source of talent,” Eros India CEO Pradeep Dwivedi told Variety. He said that a slate of new Eros and STX productions will be revealed in June when the merger is completed.

At a time of unprecedented economic turbulence, and systemic change in the entertainment industry, putting their businesses on a more sound financial footing has merit. And, in the coronavirus era, leveraging Eros’ streaming revenues could be a wise decision.

Operated from London and Mumbai and branding itself as a “global entertainment company,” Eros exited London’s second tier stock market in 2012, and relisted its shares on the main New York Stock Exchange. However, its hope for a better appreciation by the investment community only lasted a few years.

Eros has come under repeated attack from investment firms including Alpha Exposure, GeoInvesting and Hindenberg Research, which have shorted the stock and released damaging investigative research. They variously claimed that Eros inflated the number of films it released in a year; overstated theatrical revenues by more than 100% in 2015; understated revenues earned in India by booking income in Mauritius and the UAE; falsified TV and digital revenues; and used unsafe means of amortization.

In 2017, Eros won a U.S. Supreme Court case against GeoInvesting. But that did not stop credit ratings firm CARE downgrading Eros’ creditworthiness in early 2019 to “default,” citing delays in debt servicing and cash flow issues.

While the arguments were going on, Eros completely missed out on the juiciest part of 2010-2019 equity market bull run. Instead, its shares have plunged by more than 90%, from a high of over $36 in August 2015 to just $2.31 this week. Once a multibillion-dollar firm with industrial titan Mukesh Ambani as a prestigious shareholder, Eros is currently valued at a sad $304 million.

STX has also shrunk. A 2016 funding round gave the company an implied valuation of $1.55 billion. Its planned 2018 IPO in Hong Kong had guesstimates of its value as high as $3.5 billion, with $500 million of fresh capital being raised. The IPO was abandoned, due to STX’s unconvincing box office track record and the U.S.-China trade war. Senior executives including David Kosse and co-founder Bill McGlashan departed shortly after.

STX has previously positioned itself as a bridge between Hollywood and China, the world’s second largest entertainment market, and struck deals with Alibaba, Tencent and others. But it never got round to opening an office in the Middle Kingdom.

From the outset, founder Robert Simonds sought financial partners from Greater China. The merger announcement suggests that some of its Chinese and Hong Kong investors have stuck with STX, but two others may be sitting on the sidelines. The merger with Eros gives both companies a fresh sales pitch and provides STX with a renewed route to the equity markets. “We may set up a team there at some point in time,” Dwivedi now says.

“Here you have an opportunity of taking Indian talent global, bringing global talent to India, and co-creating jointly with China a content slate that really appeals to a global audience,” says Dwivedi.

Eros has tasted box-office success in the Middle Kingdom with “Bajrangi Bhaijaan” and “Andhadhun,” each of which grossed north of $45 million in the territory. It has also licensed more than 1,000 Indian titles to streaming platform iQIYI. But Eros’ co-production relationship with state-owned China Film Group Corporation has so far shown little fruit.

STX has had mixed results in China. “The Foreigner,” starring Jackie Chan, was produced in partnership with China’s Sparkle Roll Media, Wanda Media and Huayi Brothers Media, and collected some $81 million in the territory. Its “UglyDolls” earned an embarrassing $498,000.

From a content perspective, executive co-chairman Kishore Lulla is also keen on building a slate based on Indian epics like the “Ramayana” and “Mahabharata,” removing socio-religious and culture-specific aspects, and adapting the universal themes from them as franchises, using the “Avatar” and Marvel models.

However, STX doesn’t have much coming out on the horizon after the studio last month sold “My Spy,” a family friendly comedy starring Dave Bautista, to Amazon. Two of its upcoming productions — British drama “The Secret Garden” and disaster thriller “Greenland” with Gerard Butler — don’t appear to be generating much traction. And it’s unclear if its “Bad Moms” franchise, which has been commercially successful, has been played out.

The company appears confident it will be able to bulk up its slate when the merger is finalized, and noted that several projects have been signed and talent is already being considered. Eros chief content officer Riddhima Lulla is in serious discussions with the STX team, said Dwivedi.

The surprise merger announcement arrived at a time when most of the world is reeling from the coronavirus pandemic and merger and acquisition activity is at a low ebb; however, Dwivedi said merger discussions began nearly six months ago and delaying until after the pandemic would have only led to more paperwork.

The executive described the deal as a “merger of equals,” pointing to a lack of overlap and not “stepping on each other’s toes” as strategic drivers. “We absolutely fit together, because we are complementary in almost every aspect of the business and we are a similar size.”

The new entity is raising $125 million of incremental equity from “new and existing STX Entertainment equity investors,” Eros International said in its filing with the SEC.

The document named TPG, Liberty Global and Hony Capital as companies which are both existing STX shareholders and have committed to the new funding round. It is unclear whether two other firms — PCCW and Tencent — which were pre-merger backers of STX have topped up their financial commitment. Contacted by Variety, PCCW offered no comment.

The merged entity hopes to achieve cost savings of $50 million over two years, mainly by outsourcing back end post-production of Hollywood content to India, and by combining their respective global distribution networks. New content produced will eventually make its way to the Eros Now streaming platform, which has 188 million registered users and 26 million paying subscribers.

Eros Now is set to evolve.

The existing Eros Now platform will continue to exist and use the ‘freemium’ model, combining subscription VoD and a free layer, depending on the content. Above that, it will soon launch a standalone English-language platform offered only on a subscription basis. In March, Eros announced that it had signed NBCUniversal to join this tier. STX content will follow.

Eros is also getting ready to launch a third layer, of advertising-supported (AVOD) content. It has a technology deal with Microsoft to create an AI-powered platform that will enable high-speed subtitling and translations of Hollywood content. This will be available to customers in price-sensitive mass markets like middle India, Africa, Latin America and migrant workers in the Middle East.

Rebecca Rubin and Brent Lang contributed to this report.