Quickflix, the Australian grown Netflix competitor which started as a popular DVD library, has one more major hurdle before it has a chance of thriving again in Australia’s now extremely competitive streaming media market.
It must loosen the choke hold that competitor, Stan, a $100 million Fairfax Media and Nine Entertainment joint venture, has on its share register, effectively restricting raising new funds via issuing equity.
Stan holds redeemable preference shares in Quicklfix with a face value of $11,653,329, representing, when they were issued, about 11% of the business.
This is a drag on Quickflix’s books, essentially acting like a large debt anchor holding the business back, and makes any investment in the company unattractive because those preference shares take priority.
These shares stand out against ordinary shares which last trade at a fraction of one cent, about $0.001. In 2007, the shares were trading around 20 cents each.
Quickflix started in 2003 but it wasn’t until 2011 that it went into streaming. All went well and a year later it listed on the ASX.
But the arrival last year of the US giant Netflix has meant a steady deterioration in its subscriber base. It was losing, according to figures last year, 5000 paying customers a month.
Netflix has about 1 million using its service. Quickflix, as of December, had about 101,000 paying subscribers.
Quickflix, believing in the robust streaming platform it had built, first tried a deal to distribute Presto but that quickly fell apart before it started as did another deal with a Chinese entertainment company.
At the same time it went about cutting costs and trying to fix its heavy overheads for content, payments to the big studios in the US for the right to stream television shows and movies.
Much of that was fixed payments, so it went about trying to renegotiate.
Today Quickflix announced it had restructured obligations of more than $7.5 million with content providers.
And the company is looking to reposition its existing offerings including focusing its on-demand streaming service of niche content to complement those offered by competitors.
But to do that Quickflix needs new capital to fund its existing business and build out those new opportunities.
And that’s where Stan comes in.
For Quicklfix, issuing preference shares seemed like a good idea in 2011 when it entered a commercial relationship with the television show content group HBO for content.
But Nine Entertainment bought the shares from HBO in July 2014 for an undisclosed amount and then transferred them to Stan which launched in March last year.
Quickflix hasn’t the cash to buyout Stan and any attempt to raise more cash via issuing more shares is clouded by the preference shares. The preference shares act like a poison pill if Quickflix wants to sell the company. They just make it too expensive.
The preference shares rank ahead of ordinary shareholders for dividends and capital returns. And the value, $11,653,329, has to be shown on the books as a debt.
“The existence of this right is a significant disincentive for incoming investors,” founder and CEO Stephen Langsford said today.
“The board and its advisors therefore believe that securing necessary investor support for an equity capital raising, including an offer to existing shareholders, is likely to be conditional on Stan agreeing to restructure.”
Quickflix says it’s started talks with Stan.
(Disclosure: Allure Media, the publisher of Business Insider, is 100% owned by Fairfax Media.)