Last week Nine Entertainment Co made a $1m investment to buy eight per cent of streaming company Quickflix, whilst preparing to launch its own operation StreamCo. Here Nic Christensen looks at the underlying reasons for Nine buying into a rival.

In the world of video streaming last week’s investment by Nine into rival Quickflix did not go unnoticed, but as always with these deals the devil is in the detail. In this case, a series of warrants and covenants that came with this batch of shares.

Predictably, in the wake of the announcement, speculation quickly followed that US streaming giant Netflix would also seek to invest in the long troubled Australian video service Quickflix. However that theory was quickly scotched. And with good reason.

The history here is important. The 83 million preference shares in question were previously owned by content partner HBO who amid a cashflow crisis in 2012 chose to step in to save Quickflix.

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When Nine picked up the shares two weeks ago for humble investment of just $1m it also took over a redemption right put in by HBO which ensure they are protected in the case of a “liquidation event” (page 43 of the annual report).

More importantly the shares include a warrant which sees the owner entitled to a $10.5m payment in the event of “a disposal of substantially all of the Company’s assets, a merger or takeover, a person other than the shareholder acquiring a voting power of more than 51% in the Company, or any change in the majority of the members of the Board of Directors unless the replacement Directors were nominated by the majority of the Company’s Board.”

In a nutshell, if Netflix did come in and try to buy a controlling share in Quickflix it would have to pay Nine $10.5m on top of the price of its shares.

For the long troubled Quickflix which has struggled to sustain a reliable cashflow, let alone profit, in the last few years and has watched its share price steadily decline as it attempted to evolve its business from a DVD rental business to a streaming business the risk of liquidation or takeover has always loomed large.

However, Nine’s investment now makes the latter far less likely. Were Netflix or some other player (say Telstra or Seven West Media) wanting to make an easy leap into the Australian market the price tag and opportunity cost of acquiring Quickflix, which has a market capitalisation of some $17.8m, just went up dramatically.

Would a player like Netflix be willing to spend $30m to enter the market? Perhaps, but it is going to be much more reluctant to spend $11m plus if it knows that money is going to the war chest of a major rival.

Equally were Quickflix to suddenly experience a similar crisis to the one it faced two years ago Nine is now in prime position to take advantage of the opportunity to pick up any rights it might want, as well as a crack at the all-important subscriber data.

Nine’s shareholding arguably serves as an uneasy alliance with Quickflix founder and CEO Stephen Langsford who himself owns around 2 per cent of the company. This may also explain his reluctance to discuss the investment with Mumbrella in an interview last week.

While Langsford may be pleased that Nine’s investment helps avoid another board coup similar to the one he faced a month ago he must also recognise that Nine, which is spending millions of dollars investing in technology, content deals and preparing to build a subscription base, would also be eyeing his assets and it is here that the liquidation first rights must be attractive.

What the future holds for Quickflix, which continues to struggle to gain traction in the market, remains unclear. But what is certain is that at a minimum Nine has made sure anyone eyeing Quickflix as an easy entry point to the Australian streaming marketing will think twice before jumping in.

Nic Christensen is deputy editor of Mumbrella