Bollywood films producer and distributor Eros International Plc is acquiring the remaining 76 per cent stake it does not own in the digital broadcasting firm B4U Television Network in a cash-plus-stock deal worth $53.1 million (Rs 270 crore). Eros International Plc, which is promoted by the Lulla family, is listed on London’s AIM exchange and is the parent firm of the Indian public company Eros International Media Ltd.
B4U was formed as a media joint venture between billionaire steel baron Lakshmi Mittal, Gokul Binani and the Lulla family. Currently, the Mittals and the Binanis are reportedly the majority stakeholders.
B4U runs two entertainment channels, B4U Music and B4U Movies, which are available in more than 100 countries, including India, the UK, the USA, Canada and other countries in the Middle East and Africa. It generates bulk of its revenues internationally, predominantly through the fees earned from being a part of a cable or satellite service provider’s subscription package, and also from advertising within India.
Kishore Lulla, chairman and CEO of Eros said, “We expect that B4U’s global network, as well as its film and music content, will complement Eros’ existing product offering. Although we held approximately 24 per cent in B4U, Eros has not exercised significant influence over the company.”
In April 2008, Eros International Plc exercised a call option granted on June 27, 2006, and acquired Acacia Investments Ltd from a family trust in which Kishore Lulla and Sunil Lulla (Kishore’s son) were shareholders, for $10.8 million. Acacia Investments is a holding company that held 24 per cent in LMB Holdings Ltd, which operates the two satellite television channels, B4U Music and B4U Movies, through its subsidiaries. That deal implicitly valued B4U at $45 million.
So the company’s valuation has moved up 55.5 per cent in the past four years.
In the financial year ended March 31, 2011, B4U’s net income was $2.5 million and net assets stood at $28.7 million. This pegs the overall valuation of the business at 28x its one-year historical earnings, as per VCCircle estimates. Compared to this, Zee Entertainment Enterprises Ltd is currently valued at 19.5x its one-year-old net profit.
The aggregate deal value comprises a mix of cash and stock transaction with a staggered payment clause. This includes approximately $5.7 million in Eros International Plc A ordinary shares (within a month of closing the deal); $19.3 million (less the consideration in cash paid at closing) in cash and approximately $10.4 million in Eros International A ordinary shares or cash, at the option of Eros, at the end of one year of the closing of the acquisition; approximately $7.3 million in cash and around $10.4 million in Eros’ A ordinary shares or cash, at the option of Eros, at the end of second year from deal closure.
In addition, the deal also incorporates B4U’s cash-on-hand net of all B4U’s outstanding bank loans and overdrafts (a net amount of up to $19.3 million), to be paid in cash on closing.
Eros International Plc is in the process of moving out of AIM and getting listed on the New York Stock Exchange. The proposed stock part of the transaction value would be for the shares to be listed on the NYSE. However, in the event that Eros A ordinary shares are not listed on the NYSE, the portion of the payment to be made in such shares may, instead, be paid in shares of Eros’ Indian-listed subsidiary Eros International Media Ltd or in Eros’ existing ordinary shares, traded on the AIM Market.
This is interesting and if the NYSE listing doesn’t go through for some reason, Eros could issue shares worth Rs 135 crore to B4U promoters in the Indian-listed firm. Currently, this is worth around 8 per cent stake of the Indian firm, as per back-of-the-envelope calculations.
What Does It Bring To Eros?
The deal will boost Eros’ presence in the entertainment value chain – from being a content creator and distributor to a company reaching the last-mile content consumer. The acquisition will also open up a new revenue stream for Eros and that, too, with an apparently profit-making entity.
It can also leverage its own content basket much more to push the existing music and movie channels and build ad revenues in India, as well as subscription business overseas, which can bring in recurring income as against the potentially cyclical nature of production revenues from the content creation business.
Also, as almost half of the deal value is through stock issue, it would not strain the balance sheet much. It will also help Eros sell its public issue on the NYSE as an entertainment firm, with presence across various segments of the business.
The real question is what’s next for Eros. It has recently entered the movie streaming business through Eros Now (more on that here). Will it now develop B4U as a platform to take on Zee, Sony, Colors and Star, among others, in the general entertainment segment?