“Nowhere in the history of Bollywood has any studio really merged with a Hollywood producer in a manner like this.” This statement by Eros International Media Ltd (EIML) CEO Pradeep Dwivedi succinctly sums up the significance of the recent Eros-STX merger. The new global entertainment company will leverage the 40-year-old legacy of Eros and the strength of STX as one of the prominent Hollywood producers. In an interview with Indiantelevision.com, Dwivedi dwells at length on the significance of this merger, its strategic intent, the financial nitty-gritty of the deal, how the new entity will find common ground and tap the combined market of India, China, and the US, the OTT business and the effects of Covid2019 lockdown on the entertainment industry, among other things.

Edited excerpts:

The merger deal comes at a time when the entire movie production sector is shut due to the Covid2019 pandemic. So how challenging is the situation for you?

We have been working on this merger transaction for nearly six months. The timing with respect to the production stoppage is a bit odd; it happened during the last one month. We eventually believe that in the next couple of months as and when the lockdown is lifted in phases and people get back to production work, the work on the ground in terms of production slate and shoots will resume. We had, even before the lockdown, a significant inventory of content that we had built up. So, in a phased manner we are pushing it out to the digital platform. Obviously no studio releases are possible as theatres are completely shut down, not just here but in the US as well.

In this merger, what we were always planning as a strategic fit was the fact that you have STX, which is a Hollywood studio, which has been doing decent movies with top-of-the-line stars. The bottomline is that they have successfully created a content machine which is delivering good content with top-built star cast into the US market. We have had a similar ecosystem in Eros for nearly 40 years now; look at some of our hits like Vicky Donor. We had our own range of success.  

Nowhere in the history of Bollywood has any studio really merged with a Hollywood producer in a manner like this.

Can you elaborate on the structuring of the merger?

There is a structuring of the transaction. It takes about eight weeks for all regulatory approvals to come in and then the two companies become one. At the merger, only one company will survive, which is Eros STX Global Corporation. In the interim, all of STX will be moving into a subsidiary which is incorporated in the US. That subsidiary merges into a 100 per cent owned subsidiary of Eros PLC, and that subsidiary eventually merges back into Eros. Today, Eros is listed at the New York stock exchange. In fact, if you see the stock value right after the merger announcement, it jumped almost 60 per cent in terms of value. We are getting strong analysts’ support. Just now I was talking to an investor in New York. There is huge excitement in the US and the overseas investor community on this deal.   

The transaction works like this: STX, an unlisted company, has merged into Eros, a listed company, and Eros STX is the surviving company. So essentially what is happening is that the shareholders of STX will initially get what is known as contingent value rights (CVR). So effectively, we will own about 43 per cent of the surviving company. STX partners will hold another 43 per cent. Put together, it comes to around 85 per cent.

Now, let me speak about the strategic intent. We want to take the best of Hollywood and Bollywood and create a big impact in China. There, we will be looking at the creation of content, by leveraging the Chinese talent in areas like acting, directing, photography, VFX, production, post-production, music, sound, etc.

In China, who will be the partner of STX?

In China, STX has Tencent Films and Alibaba Films as the partners on the production side. On the investment side, Tencent Holdings has invested money. They were already investors in STX to begin with. Eros has two partnerships in China for distribution. Because as you know, we made serious returns on movies like Bajrangi Bhaijaan. Other Indian movies also did really well in China, for example Dangal or Andha Dhun, which we distributed in China and did a fantastic business. We have a huge distribution model, not a production/co-production model in China. We work with Shangai Film Corporation and China Film Distribution Corporation. These two are our distribution partners.

So you are looking at the Chinese market in a bigger way. What will be the roles of STX and Eros there?

It will be a combined entity; there is not going to be any difference. In fact, this merger has got nothing to do with the India business per se. Eros International Media Ltd (EIML), a Bombay Stock Exchange- and National Stock Exchange-listed company, is a subsidiary of Eros International PLC.

Eros International PLC is the holding company, which is Isle of Man-incorporated and listed in New York Stock Exchange and has multiple subsidiaries all over the world. For example, whatever OTT business we do in India is housed within Eros now, which in turn is part of EIML. The worldwide business that we do is housed in Eros Worldwide Digital which is based out of the UAE. We have distribution subsidiaries in Australia called Eros International Australia, we have one in Fiji, one in the UK, and in the US called Eros Incorporated USA, which is a distribution arm. They do the distribution business in all of those markets.  

Please give an idea about the post-merger entity and the changes at the top level.

Kishore Lulla, who is currently the CEO and chairman of Eros International PLC, becomes executive co-chairman of the combined company. Robert Simonds who has done about 70-odd movies as producer will be the CEO of the combined company. He will be my boss in that perspective. He has done almost 13-14 Adam Sandler’s top-selling movies.

I will run all of the India business and there is the worldwide studio business including the collaboration that we will do with STX. So at the base level, STX Studios continues to make movies for the US market and Eros continues to make movies for the Indian market, which covers almost 60-70 per cent of our production output.

Kishore Lulla is the executive co-chairman of the new company. Rishika Lulla, part of the management, is the co-president at the global management team of Eros-STX Global. Rishika will continue to lead the entire digital business worldwide, including what is coming from STX. Bob Simonds is the co-chairman and chief executive officer of the company. Andy Warren is the CFO of the combined company. I am running India business plus global studio collaboration. Adam Fogelson is running a global studios business. Noah Fogelson is going to manage the entire business from a US perspective. Ridhima is currently head of content – strategy for Eros. She is going to work very closely with the content leadership of STX.

About 20-25 production output will be Indo-US collaboration that Adam Fogelson, as the president of the studio business in the US, and I will collaborate and jointly work out. Then there is about a 10 per cent layer on top of that. That will be all the Chinese movies that we want to make, with a focus on mainland China; movies that reflect their ethos, culture, science fictions, action, contemporary issues, etc.

At the end of this exercise, there is no difference between STX and Eros. That’s the whole concept of the merger. We are one team.

What about Eros’ OTT business?

Ali Hussein, the CEO for the OTT business, will run the OTT business worldwide. STX worldwide does not have an OTT play, but it has a large content play. So it will obviously be selling some content to Amazon Prime, Netflix, etc. Today, Eros Now OTT has the access to Amazon, Netflix and exclusive access to Apple TV. Any India-Bollywood content you see on Apple TV will be coming from the house of Eros. The advantage it allows is that whatever the STX content is getting produced afresh we have the ability to take a call on whether we should park it in Eros Now, monetise and increase our subscriber base or to part it for Amazon, Apple, or Netflix and monetise better there. It will really depend on the financial equation there. But it gives us a tremendous amount of flexibility to be able to do both. That is one of the advantages we have on the OTT side coming from this merger.

Will there be more dubbed versions of Bollywood and regional language films for the Chinese audience?

There is a two-pronged strategy in this regard. As far as the digital front is concerned, we already have partnership with Wuzhou, one of the largest distributors in China. We are looking at other teleco partnerships, too. All the existing content, with dubbed and subtitled versions, will be available to the Chinese audience.

Then there are the originals and the new movies that we do, which will be done in collaboration with the Chinese studios. It depends on who we want to work with: Huayi Brothers, Tencent, Alibaba, etc. All of these are existing partnerships. We will take a call depending on a particular project idea, which studio or investor on their side is more comfortable with or most excited by the idea.

To answer your question specifically, yes, we will make sure that our stories are presented as an opportunity to be remade for China. We will look at China's original stories and make movies around that. And we will also look at building strong distribution strategies. So, movie production is one, distribution is another and we want to make sure that we are doing well on both the fronts in the Chinese markets. If you look at the sheer size of the market we are addressing with this joint venture, India already has 1.4 billion people, America has another population of 38 crore, and then you add China on top of that: 1.2 billion people.  So close to 3 billion people in the world is the potential market. And I am not counting other markets like Europe. Essentially, half the population of the world typically will be covered by the footprint of what we are doing right now. And we intend to make sure that we create world-class content. We have a huge reserve of stories that are original and genuine to India. For example Ramayan and Mahabharat. These stories, while they are set in Indian cultural and social context, are universal in many ways, about challenges in family, difference between right and wrong, etc. These are universal values. We intend to do this Indo-US-Chinese collaboration with the best of technology on science fiction, visual effects, etc. to create world-class content. We also wanted to showcase the slate of some of the content that we are going to make, but due to the Covid2019 situation we don’t want to do that. However, by around the end of June, when the merger deal will be closed, we will present a slate of the movies that we are going to produce.

We believe that we will get all the regulatory approvals in the next eight weeks.

Theatres are not going to be opened until September or October. When do you expect the production to resume?

We believe that by middle or end of May some level of production activities will resume. Whatever can be done inside studios, not outdoor shoots, can typically start in a controlled environment in sets with the right level of hygiene, control, safety and distancing, etc., for our studio-related works to start off. I’d expect it to stabilise only by the end of June or early July.

We still can’t say definitely when theatres will reopen. My hope is that by the end of August or early September some theatre releases will start.  

The merged entity will have half a billion in cash, right?

We already have about $195 million cash with us. We have secured $125 million fresh equity capital investment. We have got a limited sanction from JP Morgan in the US, which is leading a syndicate of six banks, to get another 350 million on the debt capital side. In addition, we have close to $300 million of predicted revenue from the 2019 slate of STX.

Now, let me explain the efficiencies in the deal. Manpower costs as a percentage of our overall costs are not outside the industry norm. What that means is that these efficiencies will come largely on account of financing integrations and on account of financing/ process integration. For example, there are a lot of VFX/post-production works that STX movies need to do. We have negotiated – because we have this typical Indian approach of doing things in a more efficient and cost-sensitive manner – we will be transferring a lot of post-production works from the US studios to the Indian studios. So, that has efficiencies in savings. There is a significant saving opportunity on the financial efficiency and post-production work side. And we believe that as we integrate some of our offices we will have some savings on that side as well. We don’t expect this merger to have any large impact on any kind of reductions simply because these are very diverse universes. In our case there is a strong fit in what we do and what they do, so it is complementary. To that extent, the two teams come together, the efficiencies can be better utilised on the operation side than on the manpower side.

How will the OTT releases work? You can’t raise the kind of money from OTT like you do through theatre releases. How will you monetise in times of shutdown?

The film and entertainment industry is going through a cataclysmic shift due to the Covid2019 situation. Theatres are likely to remain shut for the next six months, perhaps even longer in some markets.

If you look at the value chain of any monetisation for any studio, theatrical release is the largest chunk, followed by television syndication, digital and then DVD, cable and local TV distribution, in-flight distribution, etc. For six to nine months, theatrical will remain zero; it is a hit all companies will take in the top line. The market valuations of companies like Disney, Comcast, Warner Brothers, etc. have come down only because the theatrical revenues are not going to be there and that is true for everybody.

It is like an airline industry business. If you are not flying for two months, your revenues will be reduced next year and you can’t fly more in the coming time to make up for the flight that you have not done. So it is the same for the theatres; that loss is real; it is going to hit our current year financials. Fortunately, it happened in the last week of March, so we didn’t lose much from last year’s financial standpoint. So we didn’t see the impact in FY 19 books. But in 2021, all studios across the world at an industry level will be hit.

So if you are investing $100 billion in a film, you can’t get $100 billion back unless you do theatrical?

No, that is not true. That’s what I was trying to come to. The model itself is now going to shift significantly towards digital. So, as a first step, digital or OTT will overtake television as the second port of call. As and when the theatres come back next year, you will have the releases that are there. The standstill is there on both the fronts in terms of releases and production. If there are no new movies being produced you are creating a lag in the equation completely. Once the theatres start opening up, the existing, ready-to-release movies will first get released. And we are evaluating the release of the movies that we have. We have big, multi-language movies waiting to be released. We are already sitting on some content, which we will release as soon as the theatres open up. In the meantime, we will try and monetise them on OTT. Will there be any audience in theatres for the movies which have been shown on OTT? Perhaps there will be a decline. But that’s the risk you have to take. But none of our movies are mega budget movies where we need to worry about huge dependence on the theatrical.

So will you release on OTT first and then on theatres?

It’s a product-by-product call. Our current strategy is to ensure that whatever content is ready with us, we will release them in OTT, because what we want to do is to give fresh content to the OTT audience. Today, the OTT audience has increased exponentially because of the lockdown. You are stuck at home and you don’t have a choice. Old movies are now popular because there is a limitation on new content that is being produced. Here, we will release and promote our old movies in OTT.

And monetisation will definitely go up. Between last month and this month our paid subscriber base has been growing at 20 per cent per week.

Will you be selling to other OTT platforms?

We currently have partnerships with Amazon, Netflix, etc. We market movies to them. In the US, we have an exclusive partnership with Apple TV for Bollywood content. Same goes for STX. Eros-STX combined entity will evaluate every movie, a financial call which will have one of the two factors. We will see whether we are getting good price by selling/marketing it to one of the OTT platforms like Amazon or Apple TV or instead of putting it on a competitor platform, it is better to put it on Eros Now and monetise.  So, that is the kind of financial call that we have to make on every single movie that we make.

While OTT is definitely the flavour of the time and everyone is talking about it, television syndication is a big deal, which is the second largest revenue stream. Theatrical accounts for 30-35 per cent, television another 30 per cent, digital used to be 20 per cent and rest 10-15 per cent is DVD and local cable TV distribution. So, only the top 30 per cent is impacted. Rest of the 70 per cent is not impacted. And the third category, OTT, is actually expanding.

Look at an adverse scenario. If theatres don’t open for the next two years, what will you do? You need to figure out a way for the industry to monetise the content. Two things are likely to happen: studios that are agile, nimble, and mid-sized that make budgeted movies will actually do well. Look at the impact. The situation is such that the larger your studio is, the bigger the risk is, because you are putting in tonnes of money and you can’t get the money back from OTT alone. But if you are making here in India, the chances of getting the money back are much higher.

As far as OTT expansion is concerned, we have seen extraordinary growth in the last couple of weeks.

Were any of your projects halted because of the ongoing lockdown? And how do you communicate in these times?

We suspended productions by the end of June.
As far as communication is concerned we use platforms like Zoom, etc. The positive side is that a rhythm is being set. Now it starts to feel natural with all the Zoom and Skype calls. We can plan, strategise, ideate, work on script ideas, script validations, find out which projects to work on, etc. Those kinds of work can go on. But the works that have physical execution on the ground is obviously held up.