What happened
Last week, Eros International (ESGC) announced a merger with STX Entertainment. The stock traded up and down initially, but on Wednesday, shares were steadily heading higher. As of 3:45 p.m. EDT today, it was up 17.5%, after hitting a 20% gain during the session.
The new company will be called Eros STX Global Corporation, and it appears to be attracting investor attention due to its streaming service opportunity.
Could Eros STX offer a popular streaming service? Image source: Getty Images.
So what
As the world's second most-populous country, India is an attractive market for many companies. But its linguistic diversity makes it challenging. So Eros International offers a streaming video-on-demand service called Eros Now in 10 Indian languages, attracting 187 million users, including 26 million paying subscribers as of the third quarter. That was up an impressive 60% year over year.
While popular in India, Eros International has yet to find footing in the U.S., but that could change. In March, the company announced a partnership with Comcast's NBCUniversal to launch Eros Now Prime for English speakers. Originally expected to just carry Eros content, now it can also feature STX Entertainment media. And Hollywood films from STX could more easily find a U.S. audience than Bollywood flicks.
For its part, STX Entertainment didn't previously offer a streaming service. Its properties were distributed through other streaming services.
Now what
The combined companies generated around $600 million in 2019 pro forma revenue. Considering its market capitalization is around $360 million, value investors may believe the stock is undervalued at just 0.6 times trailing revenue. That would certainly explain the stock's upward move today.
However, investors should temper expectations for the U.S. streaming service. As streaming competition increases, it's more important to have compelling content to stand out. Eros' content is relatively unknown among English speakers. And STX's biggest film from 2019 was Hustlers, which barely cracked $100 million at the box office. So it's fair to question how much appetite there will be for Eros Now Prime when it launches.
