STX Separating From Eros As The Najafi Companies Sets $173M Agreement To Acquire Hollywood Studio
STX Entertainment, the studio built by Robert Simonds, has freed itself from an ill-starred 2020 merger with Mumbai-based Eros Intl. Entering a definite agreement to acquire STX for $173 million is Jahm Najafi’s Phoenix-based The Najafi Companies.
The takeover could be an interim step on the way to a later, possibly bigger, transaction. A key element of the agreement is a “go-shop period,” a 45-day span during which the board of directors of ErosSTX, with the assistance of its financial advisor, Lazard, can solicit alternative proposals from third parties.
The acquisition price does not include customary adjustments for transaction expenses and debt, including repayment of STX Entertainment debt of about $148 million.
If ErosSTX terminates the Najafi purchase agreement because it accepts a better offer, it will pay a termination fee of $4.5 million (plus the return of $2 million that Najafi has funded as a deposit) to Najafi. Likewise, Najafi will be required to pay ESGC a termination fee of $4.5 million (less the $2 million deposit) if Najafi fails to close the transaction. The transaction is expected to close by the end of January 2022.
The deal calls for an affiliate of Najafi to acquire STX Entertainment through the purchase of all of the issued and outstanding shares of common stock of a parent entity of STX Entertainment and a wholly–owned subsidiary of ErosSTX. Najafi’s acquisition will refinance the company’s debt and provide a significant investment in growth. Najafi’s rescue comes at a time when STX was facing a deadline to repay $127M in debt. ErosSTX shares had slipped below $1 for an extended period, triggering a warning from the SEC and a potential de-listing.
The Najafi Companies makes investments across the consumer, retail, ecommerce, sports, media, and technology spaces. Najafi is also the partial owner of the Phoenix Suns and is the NBA team’s vice chairman. The Iranian-American businessman also has stakes in McLaren Racing, StubHub, the Mission Advancement SPAC with Colin Kaepernick, Tracee Ellis Ross’ Patten Beauty and Scarlett Johansson’s new skincare line. In making the acquisition, Najafi teamed with The Forest Road Company, a specialty finance platform whose investments include a majority stake in Vertical Entertainment.
“This is a complicated, international public company carve-out transaction, and after countless hours over the past several months, we are thrilled to announce this new chapter with STX,” said Jahm Najafi, Founder and CEO of The Najafi Companies. “First and foremost, we believe in the power of storytelling and fostering an entertainment studio that is artist-friendly and supportive of storytellers. We are also happy to exclusively partner with The Forest Road Company on this new and multi-faceted endeavor given their expertise and partnership approach.”
It is not clear yet whether Simonds, who serves as the CEO and Co-Chairman of Eros STX, will segue back to the studio.
Shares in Eros STX, whose market value has drifted down to about $150 million, continued their long-term slide in early trading. They were at about 37 cents a share, down 7%. In August, the stock began falling under $1, which triggered a review by the Securities and Exchange Commission. The SEC also issued a warning to investors after STX Eros was late in submitting its annual report. After the merger was revealed in the spring of 2020, the merged entity’s stock began trading on the New York Stock Exchange that summer. In short order, though, Covid-related production and distribution issues only added to the headaches of reconciling the Mumbai-based operations of Eros with Burbank’s STX.
Before the pandemic, STX prided itself on supplying the theatrical marketplace with low-cost, adult demo movies which had the potential to overperform. As a company, it also enjoyed an unusual degree of access to the lucrative Chinese market, by virtue of Tencent and Hony Capital being among its backers, along with TPG and Liberty Global.
The “go-shop period” of the acquisition agreement coincides with an M&A marketplace teeming with capital and opportunity. Private equity has been injected into a number of content suppliers of late in a series of high-priced deals, with companies like Moonbug Entertainment, Hello Sunshine and SpringHill all fetching sky-high valuations. Established suppliers like Imagine and Legendary are among many companies exploring various M&A scenarios. In a marketplace where streaming has put a premium on content, any seller is in an advantageous position, as Amazon’s $8.45 billion acquisition of MGM attests.
STX had its biggest domestic opening and final box office showing in 2019 with the Jennifer Lopez outing Hustlers ($33M opening, $105M domestic). It also released the Bad Moms comedy franchise, which made close to $315M WW. During the pandemic, with theaters shuttered, STX kept itself afloat by selling titles to streamers. Dave Bautista comedy My Spy went to Amazon, and the Gerard Butler action movie Greenland skipped theatrical for PVOD release and a pay-cable/streaming rights deal with HBO Max worth $20M to $30M. STX also reteamed with Bad Moms star Kristen Bell for the comedy Queenpins, whose streaming rights sold to Paramount+ for twice the film’s $10 million cost.
ErosSTX had initially been billed by the stakeholders as a “powerhouse of east and west,” but its path to power was rocky from the start. Eros, a notable distributor of Bollywood films and also the operator of a leading streaming service, was sought as a stabilizing force for STX. Lacking a significant library or vibrant TV operation, STX was dependent on film and started to accumulate debt after a string of underperforming releases. The company had withdrawn a planned IPO in Hong Kong in 2018, citing market conditions, a move that deprived it of much-needed resources. Despite the success of Hustlers, a quest for a new financial structure led the company into the arms of Eros.