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When STX Entertainment unveiled ambitious plans in 2018 to make an initial public offering in Hong Kong — which, ultimately, didn’t come to fruition — the company expected to raise $500 million at a target valuation of $3.5 billion.
Last Friday, STX surprised the industry with news that it would be merging with Bollywood movie studio Eros International. The combined entity will be named Eros STX Global Corp. and will be listed on the New York Stock Exchange with an estimated combined valuation of somewhere north of $1 billion.
The deal represents a humbling comedown for STX. But the new Eros STX Global Corp. also makes for a unique and unprecedented proposition in the global entertainment landscape: an ambitious Hollywood indie studio with worldwide theatrical distribution arrangements, combined with an old-school Bollywood film studio that also happens to own a wide-reaching local streaming service. Could such a tie-up — two companies with vastly different backgrounds and content strategies — prove to be a mutually advantageous match, or is it more of an awkward pairing forced by circumstance?
STX was founded by film producer Robert Simonds and investor Bill McGlashan in 2014. Over the years, it has been robustly financed by TPG, China’s Hony Capital, Hong Kong telecom PCCW, Liberty Global and others. Seeking to exploit a perceived gap in the market for mid-budget, star-driven films, STX has released 34 movies, which have earned over $1.5 billion in global box office. There have been several hits, like Bad Moms ($184 million), Jennifer Lopez’s Hustlers ($157 million), and distribution of The Weinstein Co.’s The Upside ($125 million); but many more middling earners or outright flops, from Free State of Jones ($25 million) back in 2016 to last year’s pricey misfire Ugly Dolls ($32 million).
Eros has been an industry leader in India for over four decades, with local blockbusters spanning Hindi-language Bollywood (such as historical epic Bajirao Mastani in 2015) and various regional sub markets (like the Tamil-language action hit 24 from 2016). As a result, Eros has a catalog of some 12,000 titles across genres and languages.
The two companies included an investor presentation for Eros STX Global Corporation in recent filings with the Securities and Exchange Commission. There, they highlighted several upsides to the merger, such as STX’s long-touted “risk-mitigated approach to filmmaking,” but also ambitions to scale up Eros’ Indian streaming platform and to exploit both companies’ established relationships in China.
Eros has been building the Eros Now OTT service since 2012, well ahead of the arrival of global streaming giants Netflix and Amazon Prime in India in 2016. The partners say that Eros Now has 26.2 million paid subscribers and the largest library of Indian content. In a bid to widen its appeal with more international content, Eros Now has unveiled a plan to launch a premium subscription tier called Eros Prime. The service involves a partnership with NBCUniversal, which will bring hit U.S. shows such as Will & Grace, Suits and Amsterdam, among others. A launch date and price details for Eros Prime have yet to be revealed.
From its earliest days, STX has been hyping its connections and access to the China market, whether through its early 18-picture slate financing deal with Beijing-based studio Huayi Brothers or the ill-fated IPO attempt in Hong Kong. Skeptics may note STX’s pattern of extracting more investment capital from China than box office revenue though (the studio’s only significant success in China was co-producing Jackie Chan’s The Foreigner, which earned $81 million). Eros has its own relationships in China, however, as well as a more consistent track record for its Bollywood releases there. The studio’s suspense drama Andhadhun earned about $15 million at home in India in 2018 but was released in China last year to $48 million. Eros’ 2015 hit, Bajrangi Bhaijaan, starring Bollywood favorite Salman Khan, was released belatedly in China in 2018 and brought in $47 million.
In recent years, Eros also has seen its own setbacks, including a disappointing recent run at the domestic Indian box office, and accusations of accounting irregularities in the U.S.
Eros has also faced accusations of delays in loan payments. The company’s U.S. share price took a hit last June after an Indian rating agency categorized debt at Eros’ Indian subsidiary at default levels because of delays in loan repayments (the company moved quickly to reassure investors). Around the same time, short seller Hindenburg Research took aim at the studio, releasing a report claiming that Eros had misdirected funds and attempted to “hide receivables.” Eros fired back that Hindenburg was simply trying to manipulate its share price and took the firm to court (the case was later dismissed).
Shortly after news broke of the STX and Eros merger, The Hollywood Reporter spoke with Pradeep Dwivedi, CEO of Eros International’s India division, for a wide-ranging discussion about the industry’s potential skepticism of the deal and how the two partners plan to bridge the creative cultures of Burbank and Bollywood.
STX has never made a film with any Indian creative involvement or storylines. What exactly are the upsides to this merger, given that the two companies make very different kinds of content for very different core audiences?
Today, what Eros produces, co-produces and distributes globally is very different from what STX does in the U.S. and other territories, and with the deals they have in China. Between the two of us, we have the combined inventory of Hollywood and Bollywood entertainment content and a huge market opportunity in China. From a content production standpoint, there are three kinds of things that are going to emerge. Fundamentally, 50 to 60 percent of the [existing] business on the studio side, which includes films and originals, will continue to happen for both Eros and STX, respectively. If you take a layer on top, another 20 to 25 percent of content will start getting produced where we will start merging or amalgamating resources — not just acting talent but also talent on cinematography, direction and story ideas. This will be content which will appeal to audiences worldwide, and neither be seen as a Hollywood movie nor a Bollywood movie. The remaining layer of about 15 percent will be content exclusively produced for China.
STX has financial investment from Chinese corporations, and then they have distribution and production partnerships with companies like Alibaba and Tencent. On the Eros side, we already have distribution partnerships with China Film Group and Shanghai Film Corporation, and, as you know, China operates on a quota basis for [foreign films], including India and the U.S. The idea is for us to combine forces and co-create content in China, which is seen as domestic, while allowing for better theatrical and OTT consumption — and making sure there is enough content which also reaches out to the Chinese diaspora in the U.S., Europe and other countries.
But the studio story is really half the story. The bigger story is on the OTT side. STX has made about 35 films. They take extremely aggressive views on the storylines and talent they work with, but they have largely been relying on theatrical and TV syndication for revenue streams.
What kinds of projects do you plan to produce together — any examples?
We had a few content slates we wanted to announce, but we are first waiting for the regulatory approvals [for the merger], which should take four to six weeks. We expect to announce the closing, which is about both companies coming together and becoming one, which should happen around end of June. So around the closing announcement, we will also showcase the content slate for the next year at least — and the next three years in terms of outlook and also financial outlook.
Can you expand a bit on the commercial upside of the merger, as you see it?
For the calendar year 2019, Eros reached $250 million in revenues, while STX had $455 million, reflecting a combined total of $705 million. In 2019, Eros had about $210 million, while STX reached about $390, a combined total of $600 million. The reduction for Eros was because we had [fewer] movies, while STX had a huge dip due to the underperformance of Ugly Dolls being one of the factors.
However, the valuation of the combined companies is in excess of a billion dollars as of today. We have cash from two or three sources — the inventory that STX has produced actually has an underwritten revenue outlook of close to $330 million over the next couple of years. We have $195 million cash in our own books with the two balance sheets put together. We also have a $350 million limit with JP Morgan of which $230 million is clear loans and advances against projects, which is typically the capex [capital expenditure] that goes into producing a movie, and the rest of $120 million is for revolving P&A [prints and advertising] expenses to promote a movie. These funds are for the combined entity.
Eros is listed on the NYSE and is valued at close to $400 million at this point in time. We are doing a merger of equals.
In 2018, Indian conglomerate Reliance Industries acquired a 5 percent stake in Eros International. What was the value of that stake, and where does Reliance shake out following the merger with STX?
Reliance has 5 percent equity in Eros’ parent company which, obviously, by way of dilution will reduce [in the combined STX Eros entity]. So if from 100 percent Eros goes down to 42 to 43 percent, for Reliance this will also come down by that margin and will now be about 2 percent. When the Reliance-Eros deal was signed, both parties agreed to contribute $150 million each with the idea to make a bunch of movies. But between signing the deals and actually making projects, Reliance’s focus shifted significantly toward their Jio [telecom] business and holdings such as Network18, [Viacom’s Indian joint venture partner]. As a consequence, no productions were released from that joint venture and it remains where it is. Reliance continues to have a stake in the business, but operationally they are not actively involved. For Eros, Reliance is seen as a good financial investor.
Under this partnership, will STX’s distribution infrastructure and partnerships be used to distribute Indian films in North America and elsewhere? If so, how many films per year and how much revenue do you believe this could generate?
I would hold back on the revenue estimate for now, but the current slate we have — for instance our library of 12,000 titles — if we take a subset of that and use STX’s tie-ups in the U.S. with the likes of Showtime, and additionally, in over 150 countries where STX has set up a brilliant distribution network, we will have access to these markets for Bollywood content. In India, STX has theatrical distribution for its titles with [the distribution arm of India’s largest cinema chain] PVR Cinemas, but now with the theatrical shutdown, what we can do is to take STX content digitally and use it for our upcoming ErosPremium [digital platform] service. We already have content partnerships with NBCUniversal, and we can further add STX content to that with movies like Jennifer Lopez-starrer Hustlers and Guy Ritchie’s The Gentlemen. So you will find an exciting slate of movies that can come to our OTT platform.
Finally, Microsoft is also co-investing with us for a new digital delivery system based on their Azure platform, where we will have online conversion into languages and subtitles. We aim to be the OTT choice for the Indian masses, so we will have online content translation into multiple regional languages like Telugu, Bengali, Marathi, etc. This will ensure that not only [Hindi language] Bollywood but also Hollywood content reaches a wider audience.
What are some examples of STX films that have generated significant box office earnings in India?
In India, the English-language [theatrical] market is very limited, and you don’t get more than two weeks showtime in theaters unless they are Marvel Cinematic Universe films. STX films have had a decent run in India, but I would assume their theatrical play is not significant. And while we can definitely help them in that area when cinemas open up again, we believe a larger revenue model and opportunity will come on OTT platforms.
We can start with [our existing platform] ErosNow, but if we believe that STX content has strong appeal that can actually be monetized better with a Netflix or an Amazon, we are open to that as well. To be honest, if we get a decent price offer from a Disney+ for some content and we believe it is disproportionately higher than what we could get from other platforms, we are absolutely keen to get the best bang for the buck. Whichever OTT gives us the best return we will go for that. We are open to negotiating on a title-by-title basis. ErosNow becomes the default in the absence of any other commercially attractive option to park the content. ErosNow has 26 million paid subscribers, which is projected to go up to 50 million subscribers by 2022.
Will STX’s film and TV development and production teams be used to produce content for ErosNow? How much content and what kind of content?
Not immediately but in a phased manner. The cost of production, postproduction and VFX is more cost-effective in India, so for scripted series and TV entertainment we can bring in better cost efficiency [for U.S. productions]. What we are expecting from STX is a better sense of technology and skills in terms of animation or creating a thematic multigenerational concept. One of the biggest successes for Disney is the Marvel Universe. There is nothing like that from India. What we want to do is to take Indian mythologies and create longer-lasting stories. For instance, [Indian epics] like the Mahabharata and the Ramayana have universal appeal, but we have always looked at them from an Indian religious and cultural context. What if we could take these ideas and over-layer them with science fiction or virtual reality and create a surreal hypothetical universe where the underlying themes of these stories still have value but they are done with a completely different visual and cinematic appeal? We really want to build the next big franchise-movie opportunity with a combined Hollywood and Bollywood studio — and that is what STX Eros aims to achieve.
STX previously spent years courting the China market, but very few of STX’s films were released to any real success in China. It attempted to IPO in Hong Kong, citing potential China synergies, but failed to get to market. Many in Hollywood may be skeptical about this deal, believing that STX’s model of mid-budget theatrical film production simply doesn’t work in the current landscape, and now it is partnering with another major player in a developing market and promising difficult-to-grasp synergies and potential there. What’s your answer to that skepticism?
I would say the skeptics … are looking at things backwards. I agree that STX may not have had the kind of commercial success that they potentially could have had thanks to their backing. But that is where we come in as a bridge. Part of the rationale for this merger is that Asian sensibilities of movies are very different from American sensibilities. Eros has had a good track record with distributing [Indian] films like Andhadhun and Bajrangi Bhaijaan in China. There is a certain understanding of the cultural ethos of China that we believe we can work with much better compared to STX.
Film financiers from China like Alibaba and Tencent have also weighed in on this merger with the confidence that the combined entity will have a different approach to China than what it has been in the past. You can understand that the Hollywood model may not have worked in China [for STX], but there remains a strong possibility that Hollywood efficiency, financial muscle and production and technical management systems combined with Asian creative instinct and value systems — and with talent coming in from China — will create a good potent mix for success. There are risks and the movie business remains risky, but the kind of storylines and talent we are looking at, we are confident you will see completely fresh entertainment — different than anything that China or the world market has seen before.
Do you believe in STX’s mid-budget theatrical film model, or will you be pushing for changes to the new company’s content strategy for North America? How so?
I don’t think in the immediate future there is going to be any radical departure from their existing model, not necessarily because of the opportunity but because of the market constraints of theatrical under the COVID-19 scenario. I don’t see the mid-budget model changing anytime soon to a very aggressive high investment model. In fact, we would rather place our bets on a larger variety and quantum of content, which is mid-budget and risk-diversified from a return standpoint compared to doing high $250 million to 300 million budget films and betting your shirt on that.
In 2019, both STX and Eros saw many of their film releases underperform at the box office in their respective markets. At Eros, examples include Laal Kaptaan (estimated to have earned just $650,000), Gone Kesh ($17,000), Marjaavan ($6.5 million) and The Body ($90,000). In addition, several senior executives at STX recently exited, including chief content officer Oren Aviv. How do you see all this factoring into the merger?
I would see it in two parts. First, for the last two or three quarters, Eros had its own set of successes and not so great successes. And STX also had challenges. I agree Ugly Dolls didn’t perform as well as the STX team wanted it to, but then look at movies like Bad Moms 2 and Hustlers. And the January release, The Gentlemen? It has done exceedingly well. And if the theatrical shutdown had not happened [due to the novel coronavirus], STX’s next release, Greenland, starring Gerard Butler, was ready for release. I saw the rushes and as a viewer I was confident it could have done extremely well. Here is the thing — the movie business remains, to some extent, based on creative speculation. I would say if you look at a decade, or even a five-year history of both studios, we have had more successes than misses, and that trend will not change drastically. The business will always have certain elements of risk that we have to underwrite, which we can do with proven content — which brings us back to the franchise opportunity similar to the Marvel Cinematic Universe in terms of making films based on an Indian ethos with global appeal.
Second, on the management front, this is a business of high churn and turnover of people. In creative businesses, you obviously have people coming in and going out. I specifically don’t have sufficient information to comment on the movements within STX prior to this transaction, but the management team that I see right now is hugely committed to the business. Bob Simonds has made a brilliant set of movies in his lifetime — over 70, including lots of Adam Sandler hits. He is an amazing guy to work with. The rest of the team, including Andrew Warren, our CFO, comes from Discovery. So we have strong management talent and bandwidth. One or two people exiting, either on the Eros side or STX side, will not make too much of a difference.
Over the past year, Eros was accused of accounting irregularities and delays in loan payments. What is your take on that?
Good that you pointed that out. Over the last seven or eight months we believe there has been a concerted attempt by certain brokers to short the stock and drive its value down by having unsubstantiated reports going around. You can look at the Hindenburg report, though I would not refer to a specific report. But there are certain unsubstantiated reports also in the market place. We have taken a couple of actions. One is we have gone legal and taken them to court in the U.S.
But that case was dismissed.
The case was dismissed because the regulator said that it is for the SEC to take a view on that particular matter. As things stand today, these reports have been found to be untrue and we have put out statements everywhere that we are completely regular with our bank accounts; and, in fact, all the banking limits that we have signed have been thanks to the consortium of Indian bankers supporting the repayment stance that we have in India and global markets. What has happened really is that because the shorting brokers had a concerted agenda, that led to a situation where the stock has taken a beating for about three to four months — I would say even close to six months.
But now if you look at the way the stock market is responding to some of these announcements [about the merger], and some of our work in the recent past, our stock has been stable and has been on the incline. We have to stay focused on our business and not get distracted by all these externalities that keep coming in. The Indian film industry is a small fraternity, but we don’t really know who has a vested agenda against us and our way of success. But we have had a fairly successful track record for 40 years. It’s not like Eros was started yesterday; we are a legacy studio.
While these have been setbacks in the short run and have impacted the company in terms of our financial ability to manage some of the obligations, we have paid back all our debts on time. It has renewed our energy and focus on doing right by way of business and creating great content and monetizing it rather than getting worried about where the stock market is going.
Interview edited for length and clarity.
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