ErosNow’s “Fullerton Deal” brings “New Round of Questions”

The following is an analysis of Eros International Plc’s (NYSE: EROS, US$13.59) investor communications concerning the potential value of ErosNow, EROS’s streaming platform.  An earlier version of this report contained conclusions, including an analysis of EROS’s market capitalization to estimate the implied market value of ErosNow.

EROS’s Executive Chairman Kishore Lulla has attempted to make the case that ErosNow will be the “Netflix of India” and “a gatekeeper of foreign content to India”, most notably in an interview given to CNBC.

For the most recent quarter ended, December 31, 2015, EROS announced that it had reached “over 37 million registered users across WAP, APP and Web as of December 31, 2015.”  EROS provides updates on “registered users” whereas the market convention is to report on “monthly active users”. These two statistics are not interchangeable. A “registered user” is not a paying subscriber.  EROS does not disclose its ErosNow revenues or expenses, or revenues by product line or from “registered users.”  These “registered users” could be a one time buyer of ringtone that remain on ErosNow as registered users.

Concerns around these claims were highlighted by Wells Fargo analyst, Eric Katz, in a research note  on October 26, 2015:

“We’re still feeling uncertain about the ErosNow user count. . . Public websites that track app downloads (i.e. App Annie) show relatively low rankings for ErosNow vs. other Indian streaming services with lower user counts. We can’t reconcile the disparity and it’s a red flag for investors.”

On EROS’s Third Quarter Fiscal 2016 Earnings Call held on February 17, 2016, Jyoti  Deshpande, CEO of EROS stated:

[o]ur new pricing has worked wonders and we can see the positive effect it is having on conversion to paid customers. At $0.77 and $1.54 per month premium packs, we pack a punch.

However, in India there are issues that investors need to consider with respect to bandwidth and affordability. Furthermore, EROS does not provide investors with actual audited financial information to be able to tie Ms. Deshpande’s statement about the “wonders” of EROS’s new pricing and its “positive effect” on revenues and earnings together.

A Bloomberg article published July 7, 2015 titled “Eros said in Talks to Sell Stake in ErosNow to Fullerton” states that:

EROS “is in advanced talks to sell a stake in its Eros Now unit to Singapore-based Fullerton Fund Management Co., people with knowledge of the matter said. The deal, if completed, would value Eros Now at as much as $800 million, said the people, who asked not to be named because the transaction is private. That is much higher than where the market values the business now, one of the people said. Eros Now is Eros International’s streaming platform, which has about 19 million subscribers, mostly in India, one person said.”

On August 17, 2015,  Bank of America Merrill Lynch analyst Bryan Goldberg published a report in which he referred to press accounts of a possible sale of 10% of ErosNow for an implied US$0.7 – US$1 billion valuation for the business.

An article published in Bloomberg refers to Jefferies analyst, John Janedis’ October 26, 2015 research report, in which he writes:

“The nearest term validation for management would be to sell a stake in Eros Now. . . We assume an investor in ‘Now’ would be comfortable with Eros’s books.”  

The article closes stating:

“If a sale goes through at an $800 million valuation, shares may again pop — all of Eros International is currently valued at $775 million. In other words, the Eros Now unit would be worth more than the entire company. If it doesn’t, or does at a much lower value, Eros management may face a new round of questions from investors looking for answers.”

No such transaction has yet materialized.