Quickflix backs out on Chinese content company acquisition

Australian streaming video-on-demand company Quickflix has backflipped on its bid to acquire an unnamed Chinese content company denied, with the Australian Securities Exchange (ASX) stating on Monday that based on due diligence and external advice, it decided not to proceed with the acquisition.

"Based on due diligence of the Shanghai-based company and advice received in relation to Chinese regulations and restrictions, Quickflix has decided that it will not be proceeding with an acquisition," the company said.

"Quickflix recognises distribution of content into China and of Chinese content to the rest of the world is a significant opportunity and it is continuing to develop a China strategy.

"Quickflix is also pursuing opportunities for licensing and operating its studio-accredited streaming platform as a branded or white-label service in other international markets."

Earlier this month, Quickflix had announced entering a non-binding memorandum of understanding (MOU) with the then-unnamed Chinese entity, stating its intentions to acquire the Shanghai-headquartered company [PDF]-- which produces original content locally in China and internationally, and is also contracted to co-produce content in the United States -- subject to negotiations and due diligence.

"Beyond Australia and New Zealand, Quickflix is looking at global opportunities to exploit its streaming platform and capability. Quickflix is in advanced discussions with one party in particular, which may result in a corporate transaction," the company said in its Q2 results report last month.

Quickflix reported a 14 percent drop in customer base to 121,127 for the quarter to June 2015, and a 13 percent quarter-on-quarter decrease in paying customers, down to 107,969. The streaming service had a net operating and investing cash outflow of AU$1.1 million, a 29 percent quarter-on-quarter drop, but an increase of 24 percent from the same period last year. Revenue receipts from customers were AU$4.23 million, a drop of 19 percent on the same period a year ago.

Earlier this month, the company announced [PDF]that it had entered a voluntary suspension from trading "pending release of an update regarding a potential corporate transaction with an international party which may result in an acquisition".

This was followed on by news [PDF]that conditions precedent to an attempted reseller agreement with pay-TV company Foxtel's streaming service Presto had not been met, with the agreement thereby terminated.

The potential Chinese acquisition was subsequently announced, with Quickflix claiming that its new acquisition would "significantly" improve its results into the future, as well as growing its customer base.

"The Shanghai-based company is profitable and generates free cash flow. Consolidation with Quickflix would result in the combined entity having a significantly improved financial outlook and ability to access further capital for growth," the streaming company said.

Quickflix had attributed its Q2 customer losses to the launch of Netflix in Australia and New Zealand, particularly because of deals with telcos Optus and iiNet to offer unmetered access to Netflix, as well as Netflix' free subscription trials.

"Quickflix paying customers declined by 13 percent in the June quarter, impacted by the unprecedented level of free trial promotions by competitors, including those associated with the official launch of Netflix in Australia and New Zealand. Pent-up demand for Netflix generated through media and other publicity ahead of its launch resulted in a spate of customers churning in April and May, and a challenging quarter overall for the company.

"When surveyed, over 95 percent of those customers churning from Quickflix in the quarter to try a competitor streaming service were opting for Netflix."

Netflix has yet to release any results from its operations in Australia, but Roy Morgan released statistics in May stating that one million Australians were using the service.

The Australian government announced plans in May to introduce the so-called Netflix Tax , which would mandate that foreign companies selling digital TV shows, music, books, films, and subscription services to Australian customers pay the country's 10 percent GST.

According to Australian Treasurer Joe Hockey, this measure would raise AU$350 million over four years.

"Both [Treasurer Joe Hockey] and I have been quite consistent in our call in providing a level playing field for the provider of key services in Australia, whether they come from overseas or whether they're provided domestically, and this is an area that we've been working with international partners on; trying to get a good understanding of where Australia's tax system should be for the future, because we have a growing digital and e-commerce world, and the tax system needs to stay up with that game," Assistant Treasurer Josh Frydenberg said.

On Friday the government announced that GST would be applied to all products and services sold from overseas into Australia by July 2017.

In addition to streaming companies such as Quickflix, Stan, and Presto, traditional subscription pay-TV services including Foxtel are competing with Netflix, with the latter unsurprisingly supporting the introduction of the Netflix Tax.

"The government's move to enforce GST for the supply of digital content services is the right one. The digital marketplace is an increasingly competitive space, and it's critical to ensure that all players that do business in Australia do so on a level field, with no one player advantaged through tax loopholes," Foxtel's group director of corporate affairs Bruce Meagher said in a statement in May.

"The introduction of this legislation will not only help to maintain consistency across the competitive landscape, but it will also ensure that Australia gets its due taxes from the companies that choose to do business here, which benefits all Australians."