Chinese internet giant Tencent’s recent acquisition of the assets of Southeast Asian video-on-demand platform iflix has raised the ire of several minority shareholders who claim to have been caught unawares.
On June 24, ending weeks of speculation, Tencent confirmed that it had purchased the content, technology and resources of iflix. Terms of the deal, such as the value of the transaction, were not disclosed.
According to documents seen by DealStreetAsia, the asset purchase agreement between Tencent and iflix was signed June 19. As part of the deal, Tencent has acquired all or substantially all the assets of iflix as a group, while iflix retains certain assets, such as existing cash and receivables.
DealStreetAsia understands that the transaction has also secured the approval of 75 per cent of iflix shareholders.
On the face of it, the Tencent takeover looks like a done deal, even as iflix shareholders are expected to gather on July 21, mostly via teleconferencing, to vote on the transaction.
However, a number of minority shareholders that DealStreetAsia spoke to said they were still in the dark over the details of the transaction.
“Always unhappy when an investee company basically becomes insolvent. Still unhappy we don’t know details of the transaction,” one investor, who did not want to be named, said, adding that they were considering their legal position.
Minority investors often have limited information rights, or requirements for an investee company to inform shareholders of material information. It is, therefore, likely iflix did not legally impinge on any investor rights, though these are still dependent on provisions in individual shareholder agreements.
iflix CEO Marc Barnett and Kee En Lim, the company’s business manager overseeing public relations, did not respond to a DealStreetAsia query seeking a response on the possibility of some investors considering legal recourse.
Several questions remain about Tencent’s takeover, including the vendors and buyers of the assets, how the deal was structured, and whether it would stand up to regulatory scrutiny.
iflix general counsel and corporate affairs chief Emily Gebbett and CEO Barnett did not respond to DealStreetAsia’s query on the structure of the deal and whether the companies need approval from Australian regulators.
When queried, Tencent said, “Please note that no [Australian] Foreign Investment Review Board filings are required and we do not disclose the purchase terms due to commercial reasons.”
According to documents seen by DealStreetAsia, iflix retains the right to pursue ongoing arbitration proceedings against business counterparts. This, coupled with reports that Tencent did not assume iflix’s debt as part of the deal, suggests that iflix is still the legal owner of the business, even as Tencent may be the beneficial owner of the assets.
The deal announcement also came as a surprise to a number of iflix vendors and partners in Indonesia and Malaysia. Some of these vendors including content providers, marketing and event management companies, and a subtitling service provider, are believed to be still owed payment by iflix for products and services provided.
In another fallout of the takeover, there have also been additional layoffs, including nearly 100 people in Malaysia, which we understand are tied to the takeover. The country manager of Malaysia, Dinesh Ratnam, left the company in May, according to his LinkedIn profile. Separately, some iflix staffers were offered new contracts starting tentatively on June 25.
Tencent’s offer came not a moment too soon for iflix, which was once billed as Asia’s answer to Netflix. The company was founded in 2014 by Catcha Group executives Patrick Grove and Luke Elliott, and Evolution Media.
Since then, iflix raised at least $360 million from an impressive roster of investors from across the globe to fuel its aggressive expansion plans.
Its backers included British television group Sky, American publishing powerhouse Hearst Communications, and multinational telco Liberty Global. Other investors were Singapore venture capitalists Jungle Ventures and EDBI; Kuwaiti telco Zain Group; and Indonesian corporates Surya Citra Media (SCM) and Media Nusantara Citra.
None of iflix’s investors that DealStreetAsia contacted for this story were willing to comment on the Tencent deal.
In 2017 alone, iflix raised some $223 million, which allowed it to expand at an eye-watering pace. It launched services in a new country every month, covering Southeast Asia to the Middle East and Africa.
By April 2018, though, rumours of a cash crunch were swirling. iflix shut down its Singapore office, consolidating operations in Kuala Lumpur. There were no new fundraising announcements, and in December, it announced it was pulling out of Africa.
Yet soon after, CEO Mark Britt told the Australian media that iflix was targeting an initial public offering on the Australian Stock Exchange that would value the company at over $1 billion.
That proclamation seemed to have spurred on a new set of investors, including Japanese entertainment group Yoshimoto Kogyo, and South Korea’s JTBC Content Hub.
Announcing a new funding round, understood to be around $50 million, from Fidelity International in July last year, co-founder Grove had promised “a strong pipeline of new content.”
However, financials filed a couple of months later with Australian regulators in connection with the planned IPO showed that iflix only had under $13 million in cash reserves which were expected to last only until November 2019.
Those filings also showed that iflix recorded a net loss of nearly $160 million for the fiscal year 2018. It also issued $3 million Series C preference shares, and $15.5 million ordinary shares in lieu of content and marketing payments, as well as raised $47.5 million in 2019 through convertible loan notes, which had to be redeemed, if iflix failed to be publicly listed by July 31, 2020.
By April this year, iflix seemed to be a sinking ship: co-founders Grove and Luke Elliott, and two other directors resigned from the board. CEO Britt had already left in December. And dozens of employees across functions and markets were let go.
Shortly after, in May, the company appointed the owners of Mandala Asset Solutions, a Sydney-based boutique consultancy that professes to focus “on lifting value of assets,” to the board.
It may be that the coronavirus outbreak, and ensuing market volatility, put paid to its IPO and other fundraising plans. DealStreetAsia learnt that its financials for 2019, which have not been publicly available, were worse than the year before.
But as a video streaming service ostensibly loaded with old favourites and new hits, the last few months of national lockdowns ought to have been iflix’s day in the sun. Plus, iflix had hundreds of millions of dollars in backing from name investors, numerous partnerships with others, and more than 20 million subscribers scattered across Asia. What went wrong?
Asia’s streaming wars
iflix’s co-founder and erstwhile chairman Grove, who was born in Singapore, was most recently listed as having a net worth of $465 million on Forbes. He has a reputation as a serial tech entrepreneur with several startups under his belt, including iProperty Asia, which was acquired by REA Group, a unit of Rupert Murdoch’s News Corp, and iCar Asia and Frontier Digital Ventures, both listed on the ASX.
A lesser-known venture was e-commerce firm Ensogo, a Groupon replica listed on the ASX that shut down in 2016, leaving irate investors and disappointed clients in its wake. Australian publication AFR in February reported that four years later, the company continues to spend millions on winding up its subsidiaries in Asia, frustrating its shareholders.
Netflix imitator iflix started out on the premise that it would give audiences in the region access to the Western movies and television series that they were after, without resorting to piracy. In early media interviews, Britt talked about replacing video piracy, which was a multibillion-dollar industry globally, with streamed content.
The target for iflix was to amass a following of 3 billion people by the next decade.
According to industry observers, however, the plan was flawed from the start. The company spent substantial amounts on acquiring shows, before realising that they were up against sites that were streaming the same content, albeit pirated, for free.
As one former industry executive said, the biggest issue is how costly content is, compared to how much the audience is able to, or willing to, pay. “The bigger international players force OTT services to buy bundled shows – not just something that performs well,” said the person who did not want to be identified. “That in itself is a recipe for failure when you compel small regional players to pay huge amounts for content that they know won’t resonate.”
“The market clearly requires a big dose of localised, regional and vernacular content,” said Vishal Maheshwari, the former chief executive of streaming company Viu in India and now an investor at Venture Catalysts. “If you are going to the market with a purely aggregated content play, you are walking on broken glass. The cost is going through the roof, and content owners are getting smart, or greedy, depending on how you want to call it.”
iflix then switched to producing original, hyperlocal content in the markets in which it operates, and pledged half of its content budget to the endeavour.
However, iflix, much like Hooq, the Singtel-backed platform that was forced to cease operations in April, didn’t have quite the requisite grounding in the region to do so, said Vivek Couto, co-founder of Media Partners Asia. “[iflix and Hooq] discovered that winning in Indonesia was critical and to do that, you need a huge amount of local content to really compete. Those discoveries were made, particularly with iflix, after several rounds of capital was burnt.”
Separately, DealStreetAsia understands that the party outbid by Tencent, Crown Media and Entertainment, had plans to combine iflix’s operations with that of Hooq.
According to media reports, iflix had already attracted interest from big Chinese investors earlier on, reportedly from Tencent rival Alibaba in 2017, and then video-on-demand provider iQiyi, which is majority-owned by search engine Baidu, in 2018.
Additionally, according to a person close to the company, iflix had to fend off suitors last year on account of its IPO plans. The person said there were five active bidders, who went through the “full process.”
Ultimately, with the takeover, it is Tencent that is gunning to make significant inroads into the content streaming market across Southeast Asia.
As Britt said in an email to iflix employees: “Know this. Tencent will win video in [South] East Asia over the next decade – I have zero doubt.”
Aastha Maheshwari, Yimie Yong, Sarah Yuniarni and Ravi Balakrishnan contributed to this story.