Naveen Jeereddi of Jeereddi Partners presented his in-depth investment thesis on Eros STX Global Corporation (US: ESGC) at Best Ideas 2021.

Thesis summary:

Eros STX is a special situation investment in a global business exhibiting strong secular growth. With complexity going away and business value growing, Naveen expects the valuation discount versus comparable companies such as Netflix, Disney, and Amazon, to adjust favorably.

The company’s Eros Now subsidiary is an Indian “Netflix” with the largest streaming library of movies in several Indian languages. Based on Indian library size, Eros Now is roughly twice the size of Disney+ Hotstar, more than twice the size of ZEE5 (owned by privately held Essel Group), nearly three times the size of Amazon Prime Video, and about eight times the size of Netflix. Naveen views the Eros Now library as a valuable strategic asset.

Eros STX was formed through the recently completed merger of India-based Eros International and U.S.-based STX Entertainment. Former Eros and STX investors own roughly equal parts of the combined entity. This makes STX’s savvy backers large shareholders of Eros STX — including U.S. private equity firm TPG, Chinese private equity firm Hony Capital, Internet juggernaut Tencent, Richard Li’s PCCW, and John Malone’s Liberty Global. The strategic investors infused an additional $100+ million of equity capital into the combined company in 2020 at a price of ~$3 per share.

In a relatively short time, STX has created a high-ROIC, asset-light movie studio to fill a profitable, underserved niche. STX management brings best-in-class expertise to the top of Eros STX, including CEO Robert Simonds, STX founder and former film producer resposible for 30+ major studio titles, and CFO Andy Warren, former CFO of Discovery Communications and NBC Universal Television. A post-merger management option package covering ~40 million shares has yet to be priced, creating an interesting short-term dynamic in which the company has had little incentive to focus on investor relations.

Eros STX has a recent enterprise value of ~$1.2 billion, comprised of ~$840 million in equity value ($2 x 420 million shares outstanding, including ~40 million shares underlying new management options) plus ~$325 million of net debt. This suggests a valuation of less than $30 per subscriber, based on 36 million paid subs, a number that is growing quickly toward 50+ million in an addressable market offering a long runway of growth. By comparison, CuriosityStream (US: CURI) trades at ~$70 per sub, Crunchy Roll was acquired by Sony for ~$390 per sub, and Netflix trades at ~$1,000+ per sub.

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About the instructor:

Naveen Jeereddi is CEO and portfolio manager of Jeereddi Investments LP. He has over two decades of value-oriented experience financing, analyzing, and investing in public and private companies. Also, he has extensive portfolio and risk management experience. Naveen has served in value investment roles at Donaldson, Lufkin & Jenrette, Onex Corporation, The Baupost Group L.L.C., and Tala Investments LP. He currently serves on the boards of directors of Chandler Global PTE Ltd, XPRS Capital LLC, iDream Media Inc., Basket Savings Inc., and the Webb Schools of California. He earned an MBA with distinction from the Harvard Business School and a BBA with high distinction from the University of Michigan. Naveen lives in Los Angeles with his wife, Amy, and their four children.

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