|Shares Out. (in M):||60||P/E||0||0|
|Market Cap (in $M):||970||P/FCF||0||0|
|Net Debt (in $M):||240||EBIT||0||0|
|Borrow Cost:||Hard to Impossible 50%+ cost|
THIS IS A HEAVILY SHORTED STOCK SO IF YOU DONT LIKE THEM OR USING OPTIONS, MOVE ON.
Eros International PLC (EROS) is a very heavily shorted stock (options available) that has seen its stock trade up significantly because
1) Unsourced reports that the company will be sold for $ 1billion to Apple. Interestingly, these reports surfaced soon after the company filed a $350 million shelf offering. We believe the reports are untrue, but the original aug 7th story, from an indian newspaper (which was picked up in many other places can be found here http://economictimes.indiatimes.com/industry/media/entertainment/media/eros-group-in-talks-with-apple-to-sell-its-content-library-of-movies-and-music-for-around-1-billion/articleshow/59946497.cms
2) The highly levered company’s ability to repay part of its revolver, although much of the repayment was made by selling equity in its majority owned (and most valuable) subsidiary.
3) Momentum investors bidding up the stock.
EROS consists of 2 major assets:
1) a 60% interest in Eros International Media, which is publicly traded in India (eros IN equity on Bloomberg). We refer to this entity as SUB. SUB acquires, co-produces and distritubes Indian films accorss all available formats suchs as cinema, tv and new media. The company has a growing library of over 3k films.
2) 100% ownership in EROS Now , a digital OTT entertainment service with 60 mm registered users (2.1 mm paying) that has rights to over 10,000 films, out of which around 5,000 films are owned in perpetuity, across Hindi and regional languages from Eros’s internal library as well as third party aggregated content.
Eros is in a difficult financial situation since it has debt but little cash flow at the Eros (or holdco) level while most of the cash flow (and some additional debt) it reports on a consolidated basis is trapped at its 60% owned SUB and it can’t dividend the cash upto holdco to service the debt. The debt at EROS or Holdco indicates distress and includes:
1) $63 million of publicly traded debt that yields 17%. ( This 6.5% Sr. Unsecured due 2021 trades in London with pricing available on Bloomberg)
2) $6.5 million of 12% related party debt the company recently obtained.
3) $45 million Revolver which was amended several times this year and now is at Libor + 7.5% and matures end of September
In an effort to pay down its holdco debt, EROS has recently:
1) Continued to sell down its equity ownership in SUB on the Indian stock exchange.
2) Incurred $ 6 million related party at 12% interest.
3) Refinanced its revolver that was due earlier this year so that is now due at the end of September
Stock Price $16.20
Equity Cap 970
Min int 120 (market value of 40% interest)
Enterprise Value $1,200
EV/2018E Revenue ($298 mm) 4.1x
EV/2018E Adj EBITDA ($59 mm) 20.5x
All estimates as per Jefferies
VALUATION Part II
On a very simplistic sum of the parts basis, (lets ignore cash and debt) if the public markets in India are valuing EROS’s 60% ownership in the sub at $180 million, that would imply the remaining assets (primarily EROS NOW) are worth $850 mm (970-120), which seems rather high to us considering EROS loses money, generated $10mm of rev last year and is estimated to do $40 million this year.
EROS BEING SOLD FOR $ 1bn
Putting aside if strategically it makes sense for Apple or Netflix or anyone else to buy EROS or at what value the deal would come, we don’t think a deal is happening because:
1) The Indian markets and debt markets (usually smarter than the equity markets) are indicating a sale is not happening.
2) EROS has been selling equity in SUB (its most valuable asset) so why sell if you’re about to be sold at a premium.
3) On August 7, SUB issued a press release “seeking clarification for” the article that speculated EROS would be sold for $1bn. SUB’s press release said it was not “privy to any strategic discussion that [EROS] may be having with various potential partners.” However there is a very close relationship between SUB and EROS, so if there were sale talks, we don’t see how SUB could not be aware of them. The close relationship between the 2 entities includes (i) 4 of the SUB’s 6 Board Directors also are Directors of EROS and (ii) The CEO of SUB is also the CEO of EROS.
1) Last month, SUB announced earnings for the June quarter. In Indian currency Revenue was down 33% and EBITT was down 9%, year over year. Eros has yet to release its consolidated June quarterly results (presumably they are furiously trying to raise $ to repay the revolver and other cash needs), but it shouldn’t be that difficult to do considering the SUB financials are complete.
2) Many have criticized the company’s accounting, corporate governance, etc.
3) The equity of SUB hasn’t traded up much since the August 7 story, but the US equity of EROS has traded up 60% (perhaps short squeeze).
4) The most recently filed F-3 shows EROS Fixed coverage ratio (earnings to fixed charges) at March 2017 (the latest available information) was 1.15x. down from 1.90x same time previous year. We suspect that figure at June 2017 will be even worse as the June 2017 considering the results for SUB have deteriorated.
1) Release of consolidated results
2) results of refinancing debt
3) more sunlight