“Additionally, the new company's risk-mitigated production/distribution model requires the limited company’s equity investment to produce content at scale featuring low overheads, and utilises third-party funding to drive attractive margins and returns on investment,” says Dwivedi.“Also, the merged company has a robust pipeline of feature-length films and episodic content with powerful, well-established positions in the world's fastest-growing global markets”.

Today’s audiences are looking for all-inclusive content across languages, formats and genres. This combined business model will, therefore, have the unique capability to present Eros' and STX's robust film and episodic libraries and pipeline of original content to a broad and growing global audience. The content is consumed through multi-year output deals, strategic alliances and the markets leading to the Eros Now streaming platform.

Merger of equals

Pinnacle Associates International Small Cap Equity Portfolio calls this a transformative merger of equals. STX Entertainment, a private company based in Hollywood, looks at China as its end market, while Eros has its focus on India. It has production deals with Jackie Chan and is best known for producing Jennifer Lopez’s recent success Hustlers. “In 2018, STX considered a potential IPO in Hong Kong, though it was never put into practice,” states the Pinnacle report. “Such a move would have valued STX’s business at $2.5 billion. As on 31 March 2020, Eros’ market cap was under $500 million and we stress again that both companies regarded this as a ‘merger of equals’”.

Put differently, Eros’ enterprise is worth more than it was being given value for in the public markets.Now, the new company is off to a promising start. Eros’ product is now available on Apple+, while STX comes into the deal with over $50 million of syndication (a fancy term for re-runs) revenue already lined up for 2021 via Netflix and other OTT providers. Since production dollars have already been spent, new revenue flows almost entirely to cash flow. The combined unit will have 30 percent margins, before even considering potential synergies. 

“Eros’ new combination occurs at a unique moment in time. Since the entertainment industry has essentially come to a halt in the wake of Covid-19, production companies with libraries have, at least for the moment, premium valuations. As a reminder, Eros has, by far, the largest global library of Bollywood films (over 13,000). Given an ascendant middle class of Indians, who are likely to consume more local content, the stock could double in share price from current levels,” adds the Pinnacle report.“This sets up a Hollywood-Bollywood film production and distribution business, with $600 million in pro-forma 2019 revenue,” observes Tim Nollen, analyst, Macquarie Capital (US) Inc.

“Eros STX will be capitalised with 424 million shares including equity issued to STX, with new shares issued to investors including TPG and Liberty Global, and a management pool. Eros has paid down itsconvertible bond and the new company will sustain $254 million in net debt, including $144 million in cash as of 31 July, and supported with a new $350 million credit facility. Eros STX targets $1 billion in revenue for calendar 2022, including some $300 million in already booked syndication sales from STX to TV and SVOD (Subscription Video On Demand) providers in the US and international,” he adds.

“Eros STX is a subscription streaming leader in the Indian market and the country's best-performing company at the box office over the last decade,” points out Keith Noonan, in his report: An entertainment leader in a potentially explosive emerging market. “If you consider those distinctions along with the fact that India has a fast-growing economy and a population of nearly 1.4 billion people, Eros' recent stock performance might seem a bit surprising. Shares are down roughly 20 per cent year to date and more than 60 per cent over the last three years. However, the stock has the potential to deliver explosive returns, and recentselloffs have presented a worthwhile buying opportunity.”

“Eros's last earnings report arrived with a loss that was much bigger than the market anticipated,” adds Noonan. “Investors also don't seem to be ascribing much value to the company's recently completed merger with STX – an American film and television company. The coronavirus pandemic has meant closure for movie theatres in India as also around the globe, and the company is taking on debt to finance productions, but Eros stock could turn into a life changing investment for those willing to weather volatility.With a market capitalisation of roughly $515 million, Eros is solidly in small-cap territory and has the potential topost explosive gains if the company delivers wins onsome key fronts. Even if those wins take some time tomaterialise, the company looks very cheaply valued at present”.

Meanwhile, the Maharashtra government has finally given the nod to re-open cinemas, after nearly eight months. “The state is important for the industry, as it contributes nearly 20 per cent of the box office revenues,” states a CARE report. “Hence, it brings a sigh of relief to not only the film exhibitors but other stakeholders like movie producers, distributors, actors, junior artists, etc, also. The film entertainment is a labour-intensive industry and hence, the lockdowns affected employment levels in the industry to a large extent. While the Central government gave consent to restart theatres in the country from 15 October onwards, following the order was at the discretion of state governments. States like Maharashtra, where Covid-19 cases were rapidly increasing, kept the decision on hold.”

"The reopening of theatres is a relief for studios and theatre owners, while once again offering audiences the unparalleled experience of watching movies on big screens,” remarks Shikha Kapur, COO, Eros Motion Pictures. “We are looking forward to entertaining audiences in this era of the ‘new normal’. The pandemic has led to a surge of content consumption across genres and platforms and this is a hugely encouraging indicator for content creators and providers.”

Says Dwivedi: “The cinema-going audience is preparing to visit cinema houses and follow all protocols before venturing into a theatre. Cinema is and will always remain an expression of creativity and imagination and we look forward to fostering a stronger bond with our audiences. Their safety and well-being will always be our first priority and we are sure that cinemas will follow the strictest protocols to ensure that our audiences can safely enjoy the movie-going experience."

The pandemic has broken the rhythm of the creative industry, especially films. “But the creative minds at Eros have already found ways to bypass these obstacles, even under the present-day circumstances, and have found more creative ways to produce shows,” adds Dwivedi. “Despite the lockdown, Eros Now released four originals including Flesh, Metro Park: Quarantine Edition, Date Gone Wrong 2 and A Viral Wedding: Made in Lockdown. While Flesh was shot before the lockdown, the other shows were shot indoors, through the most advanced digital technologies. As physical outdoor shooting is expected to face challenges in the recent future as well, Eros will make the most of Unreal Engine across its production slate in partnership with Epic Games. The collaboration will assist Eros in pushing the envelope of high-quality pre-visualisation, virtual production, and in-camera visual effects that take time out of post-production.”

“With regards to theatrical release, Haathimere saathi is the first of many exciting future announcements,” says Dwivedi, while commenting on the future content slate. “The much-anticipated project will hit the theatres on maker sankranti in 2021. We are currently also working on a slate of amazing movies planned for next two years or so.”

Growing bigger

Eros Now is being converted from a standalone service into a network. The platform, which is home to the most entertaining Indian movies, especially Bollywood films,engages205.8 million registered users and 33.8 million paying subscribers worldwide with fresh originals, regional language content and music,and will soon tap international content enthusiasts across the country and worldwide. 

“The launch of Eros Now Prime in partnership with international studio NBC Universal will help in expanding the platform’s reach,” says Dwivedi of Eros International Media. “The Eros-STX merger further positions the OTT platform to offer some exciting releases in the future. At a time when the audience is increasingly consuming fresh and entertaining content on the digital platforms, Eros Now’s mega content slate announcement, which is in the pipeline, will cater to this growing demand.”

Multiple original and acquired content from a massive upcoming content catalogue will hit the platform every couple of weeks. Further, Eros Now will offer multiple shows in different formats and languages to attract an audience base across geographies and demographics.