As part of the IPO Eros will issue 12.5m 'A' ordinary shares at a price between $15 (£9.31) and $17 per share. Of these shares, 7.8m will be issued by the company and a further 4.68m will be offered by certain selling shareholders. The underwriters will be granted a 30-day option to purchase up to 468,750 additional shares from the company and 1.4m additional shares from the selling shareholders to cover over-allotments, if any.
The price range reflects the company's proposed 1-for-3 consolidation of its existing ordinary shares in connection with the offering and proposed listing on the NYSE. Post the listing there will be 51.4m shares in issue giving Eros a market value of between $771m to $871m.
At current exchange rates this implies a price range of 931p to 1056p per 'A' ordinary share listed on the NYSE, which equates to a price range of between 310p to 352p per Eros ordinary share listed on Aim. So with the company's Aim shares currently trading on a bid-offer spread of 292p to 300p, the investment risk definitely looks skewed to the upside as there is potentially 17 per cent upside by buying the ordinary shares now on Aim and selling them in New York once you have been allotted the new 'A' the ordinary shares. The upside could be potentially more since I expect the after market to be strong in the US once the shares are listed.
Expect a warm reception in the Big Apple
In my opinion, a US-listing will give Eros a strategic advantage, access to additional equity capital and liquidity, as well as trading with a more comparable peer group with broader analyst coverage. It is also one that I expect US investors to warm to given that given that I estimate Eros's shares are now rated on a forward PE ratio of 15 for the financial year to March 2014, factoring in the extra shares in issue post the US listing and the rise in the share price since I last highlighted the investment opportunity a fortnight ago when the price was 250p ('Time for some price action', 22 October 2013).
Moreover, the proceeds of the fund raise virtually wipes out Eros's net debt which means that the company's enterprise value (market value plus net borrowings) to cash profits ratio is only 10 at the bottom of the price range and less than 12 at the top of the range, based on earnings estimates for the financial year to end March 2014. This is favourable compared with US content providers.
As I pointed in my indepth analysis a couple of months ago ('Buy ahead of the IPO', 11 Sep 2013), I feel that US investors will be attracted by Eros's game-changing joint venture with US premium network operator HBO, which significantly increases the appeal of the company's shares to US fund managers.
This landmark agreement not only brings the best of Hollywood and Bollywood together, but means that Eros is ideally placed to tap into the rapid growth forecast in the digital pay-TV (direct-to-home satellite and cable) markets in India. In fact, driven by the growth in the middle classes, who spend far more on entertainment, analysts at KPMG predict digital pay-TV audiences in India will rocket from around 65m this year to 161m by 2016.
So, in order to capitalise on this opportunity, earlier this year the company launched two new premium advertising-free movie channels, HBO DEFINED and HBO HITS, to bring digital-only, advertising-free film and TV content channels to the growing pay-TV market in India. The channels feature Indian movie content in a new premium movie window shortly after its theatrical release as well as all film content from Warner Brothers and Paramount. These channels are co-branded and revenues are based on a share of subscription fees from carrying networks.
By shortening the lead in times for release of movies to the pay-TV market, the joint venture has a massive marketing pull over other players to attract customers willing to pay to view films at a much earlier date than was previously possible. It is likely to prove highly profitable as analyst Patrick Yau at broker Peel Hunt predicts that net profits from the venture could ramp up from $3m on a net subscriber base of 800,000 in the financial year to March 2014, to $16.5m the year after (net subscriber base of 2.2m). In the financial year to March 2016, Mr Yau predicts net profits of $43.3m assuming net subscribers of 3.6m out of a total pay-TV market of 169m in India that year. It is this growth driver that is likely to lead to a strong aftermarket in Eros shares once they list on the NYSE.
It's worth noting, too, that Eros has a free ride here as there are no ongoing costs for the company since HBO Asia and Turner International India (also owned by Time Warner) will run the day-to-day management of the channels. The contribution of Eros to the joint venture is in providing a quota of new movies and library titles as well as marketing and local expertise.
Mechanics of US listing
Please note that following the Aim delisting, and simultaneous US listing, shareholders will be allocated 'A' ordinary shares on the basis of a three-for-one consolidation for the existing Aim-traded ordinary shares. These 'A' ordinary shares can only be tradable on the NYSE through a broker on that exchange and in compliance with US securities laws.
Therefore, you will need to use an eligible US broker that is able to hold securities administered through the DTC (Depository Trust Company, the US equivalent of CREST) prior to attempting to sell your allotted 'A' ordinary shares on the NYSE. I would advise that you contact your UK broker to see if they are able to trade US-listed shares for you. If not you will need to find one that can.
However, with 17 per cent potential upside on offer here, and possibly more if the after market is strong in New York, it's something well worth doing to take advantage of the valuation anomaly on offer. Needless to say, trading on a bid offer spread of 292p to 300p, I rate Eros shares a trading buy and maintain a price target of 350p - equivalent to a price of $17 per each 'A' ordinary NYSE-listed share you will be allocated for every three Aim-traded Eros shares you buy now.
■ Finally, as a pre-Christmas offer exclusive to Investors Chronicle readers, all telephone orders placed with YPDBooks for my new book Stock Picking for Profit will receive complimentary postage and packaging. This offer is strictly for a limited period, is subject to stock availability and applies to only telephone orders placed until Friday, 15 November 2013.
Please note the book is only being sold through YPDBooks and no other source. Full details of the content of the book is available online at www.ypdbooks.com. If you would like to take advantage of this offer, please contact YPDBooks on 01904 431 213 and quote reference 'ICOFFER'. The book is priced at £14.99. Internet orders will continue to incur the normal postage and packaging cost of £2.75. I have also published an article outlining the content of the book: 'Secrets to successful stock picking'.
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