Things have been going downhill for the studio behind “The Upside.” After abandoning plans to go public, STX Entertainment has struck a $1.1 billion deal with India’s New York-listed Eros International at a considerably lower equity valuation than the $3 billion it had been seeking in Hong Kong in 2018. And there are other worrisome wrinkles to the plot.
It’s a glitzy proposition to unite Hollywood and Bollywood. STX brings hits like J-Lo’s “Hustlers,” and A-list backers including buyout shop TPG, cable mogul John Malone and Chinese tech titan Tencent. Eros supplies a valuable library of 3,000 features in Hindi and other languages – “Bajirao Mastani” among them – and a well-stocked video streaming service with 26 million paying subscribers.
The merger has a complex script. A 50-50 split will be diluted by the injection of $125 million, much of it from existing STX owners. They end up with a 15% stake, using a variable pricing mechanism, while the combined management team receives 9%. Eros Chairman Kishore Lulla and his family surrender supervoting control for a lesser say in the rebranded Eros STX. In the end, the implied value of STX’s 38% slug is barely more than the $370 million it has raised privately.There are other scary twists. Box-office struggles were hurting STX before the pandemic closed cinema chains and raised fresh doubts about the future of theatrical releases. Eros has struggled to shake off accounting fraud allegations, funding concerns and short-selling sieges. Its shares have plummeted from $36 in 2015 to below $3.
Only some movie magic will produce a blockbuster. Eros and STX anticipate $50 million of cost savings and revenue uplifts from distribution in India and other efforts. Those synergies should be worth at least $400 million today, but the Eros stock price suggests there is scepticism.
The bad reviews may be warranted. Online entertainment competition is fierce in India. Eros STX will be up against deep-pocketed rivals such as Netflix, Walt Disney and Sony. Western buyers also have underestimated India’s corporate governance risks before. Even with its compelling elements, this financial production is in danger of being a flop.
The gist of it
– Hollywood studio STX Entertainment and India’s Eros International said on April 17 that they would unite in an all-stock merger to create an estimated $1.3 billion enterprise.
– Under terms of the transaction, Eros International shareholders and STX would initially own equal 50% stakes in the newly created entity. As part of the deal, another $125 million will be invested in the company, including by existing backers of STX such as private equity firm TPG, China’s Hony Capital and cable pioneer John Malone. Shares will be made available to management that further dilute the respective equity stakes of the two companies.
– The Eros founder group, which holds a class of supervoting stock, will see its voting power shrink to 41% in the new company, with certain limitations, and its economic stake to about 9%. The two companies expect to generate $50 million of annual synergies from the deal.
– STX Chairman and Chief Executive Robert Simonds will be co-chairman and CEO of Eros STX Global while Eros Chairman and CEO Kishore Lulla will serve as co-chairman.
– Eros shares, which had closed at $1.96 apiece on April 16, traded as high as $4.35 following the announcement. They closed on April 24 at $2.51.
– Citigroup is advising Eros while PJT Partners advises STX.
(The author is a Breakingviews columnist. The opinions expressed are his own.)
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