Demystifying the Reliance-TV18-ETV deal

MUMBAI: For founder-promoter Raghav Bahl, the financial stress of his two expanding companies needed a bold rescue act. He did not want to let his media and entertainment empire shrink. The desire to gamble was still strong in a man who had used the bull phase to grow his business the fastest.

Bahl found in Mukesh Ambani, India?s richest billionaire, the ideal saviour. He could get into the fast-growing regional markets with the purchase of Eenadu TV network, win the support of Reliance Industries and clean-up net debt that had climbed to Rs 21 billion.

Of course, Ambani demanded his pound of flesh. We don‘t know how much stake he will eventually have as the subsidiary of Reliance Industries is investing in Bahl?s privately held entity. But the acquired assets of ETV Network are coming for a steep price of Rs 21 billion.

Bahl could have gone the NDTV way and trimmed the size of his media empire. When Dr. Prannoy Roy faced a similar choice with Hindi general entertainment channel NDTV Imagine kicking in losses, he put his diversified entertainment venture up on sale to protect his core TV news business. But Bahl had successfully built Colors, the Hindi GEC that earns a revenue of close to Rs 10 billion a year. So he selected the elder Ambani brother as his partner.

?We see merit in inclusion of the regional broadcasting assets of Eenadu into TV18, placing it in the league of networks such as Star and Zee. Incrementally, our concern on capitalisation (given the imminent need to de-leverage as interest costs were eating all of operational profits) stands to get addressed with this deal. Thus, the deal seems to be operationally positive for TV18,? says IDFC Securities Ltd managing director Nikhil Vora.

The only way for TV18 to justify the deal is by increasing the topline, primarily through subscription revenues and the regional channels. Media buyers agree that regional TV channels have significantly consolidated their position over the last few years and now together contribute close to 25 per cent of the overall TV ad pie.

The majority of the media buyers are of the opinion that in the near future no immediate impact would be seen. However, in the long run, the move may bear positive consequences for TV18. Avers Lodestar UM CEO Shashi Sinha, "I don?t think it will make a big difference because we buy every channel on its merit, whether it is a TV18 channel or ETV or CNBC. Thus it won‘t make a big difference from a media buyer?s point of view."

ZenithOptimedia managing partner Sanjoy Chakrabarty, however, feels TV18 could benefit with the addition of the regional channels. "Whether the ad sales will go up and how much is too early a prediction to make now. But the acquisition of the ETV channels will definitely make TV18 a stronger force in the market."

Agrees Maxus MD south Asia Ajit Varghese: "The ad sales will go where the content goes. So, the market will still tip in the favour of the channels with viewership pulling content."

Marathi and Bengali markets are the fastest growing and more significant regional markets in terms of ad spend. Bengali and Marathi saw growth rates in ad revenues of more than 50 per cent in 2010 as Star emerged as a strong force. ETV has a strong grip in these markets and, under the guidance of TV18, can post significant revenue gains.

The buyout of ETV (for details see the table) may help cut costs as TV18 will consolidate sales and packaging, but that will take time. The network will have a wider choice while offering deals to advertisers and media buyers. The trick, according to industry experts, will lie in tactical packaging.

Explains Helios Media founder director Divya Radhakrishnan, ?If TV18 is planning to package it as a single window offering, obviously it will make a lot more impact on media buyers. It is similar to what Times of India does. If you buy TOI you get Maharashtra times or NBT. So, it depends on what they are going to put up as an offering.?

She continues, ?If you bundle it, it offers a huge advantage, if not then it doesn?t. Sometimes, if you take it as a package and even if the content is not healthy but there is good reach, it is acceptable. So it?s important for the principal channel to be strong. As a media buyer, suppose I get Colors and ETV Marathi, I can drop Zee Marathi.?

The popular opinion is that if TV18 succeeds in using the content sources from ETV and couples it with a strong marketing approach, it could reap a rich ad revenue harvest.

What will the impact be on regional news channels? Considering that the national news channels are seeing slow ad revenue growth, the consolidation drive may pump up the pace for the TV18 group.

Most industry pundits agree that the regional news channels? ad market is growing steadily, particularly in the Bengali and Marathi markets. TV18?s move will further provide boost to this segment.

Sinha prefers to disagree. ?I don?t think there is a saturation on the national level. There is a future for regional but there is no saturation as the ad volumes are coming because of which so much advertising is happening. They just have to ensure that enough money comes their way.?

However, the regional markets where ETV operates have their own limitations in terms of scalability and are subject to strong competition from groups such as Star and Zee.

?With the regional broadcasting industry size pegged at Rs 30 billion (excluding Tamil Nadu where ETV does not have a presence) and given the fact that the competitive intensity would at best result into a 15-20 per cent market share for any player, we believe the opportunity size for ETV Network at best stands at Rs 6 billion currently,? says Vohra.

The big question mark being raised by all is the valuation of the deal. TV18 has valued the partial ownership in the broadcasting assets of Eenadu at Rs 21 billion, implying an entity value of Rs 35 billion for ETV Network. ETV Network is estimated to have garnered revenues of Rs 5.25 billion in FY?11.

According to estimates by a media analyst at a local broking firm, TV18 is buying only 64 per cent of economic interest in ETV?s revenues. Network18 and TV18 will go for a rights issue of Rs 27 billion each. Since N18 holds 50 per cent in TV18, the net aggregate rights proceeds will be for Rs 40 billion.

Says Vohra, ? For TV18 shareholders to generate an optimal RoE of 15% from the transaction in the next 5 years, ETV Network would need to garner a net profit of Rs 5.5 billion+ (equal to its revenues today!). Against this backdrop, we believe it will be extremely challenging to justify the economic merit of this transaction for TV18 shareholders.?

The nature of the transaction has also raised eyebrows. Says Vohra, ?Given the nature of the transaction as also valuation premium attached to the deal, we believe TV18 and Network18 shareholders are facing the risk of serious dilution (TV18 with a current market cap of Rs13bn is raising an incremental Rs27bn; Network18 with a current market cap of Rs7.3bn is raising Rs27bn!) with no meaningful returns.?

Vohra is even predicting a strong Reliance Industries presence in Network18. ?While details of the private deal between RIL (or Independent Media Trust) and promoters of Network18 is not available, we see the funding of Network18 promoter entities by RIL potentially translating into an equity ownership for RIL into Network18. Our sense is that RIL would eventually be classified as a co-promoter and would hold a significant equity stake in Network18,? he adds.

The RIL Tangle

? In 2008, Ramoji Rao, JM Financial and RIL structure a deal wherein RIL takes ownership of the broadcasting business for Rs 26 bn; gets 49% indirect ownership in two channels of the ETV Network (particularly ETV Telugu and ETV Telugu News) and 100% interest in the remaining 10 channels of the Group.

? TV18 acquires 100% stake in 5 regional news channels of ETV (where RIL has 100% interest), 50% stake in 5 regional GEC channels excluding Telugu (where RIL has 100% interest) and 24.5% stake in ETV Telugu channels (where RIL has 49% interest).

? TV18 & Network18 Media promoters doing rights issue of Rs 27 bn. With Network18 having 50% ownership in TV18 (and effectively subscribing for Rs 13.5bn in the TV18 rights issue), net capital raise for the TV18 Group will stand at Rs 40 bn. Further, total capital contribution from the Promoter Group of TV18 for the rights issue would stand at Rs 17 bn.

? RIL (via Independent Media Trust) will be funding promoter entities of Network18 for rights issue in form of Optionally Convertible Debentures (OCDs). While promoter entities are entitled to a minimum subscription of Rs17 bn in the Network18 rights, the management has undertaken to subscribe to any unsubscribed portion of the rights issue in either of the entities ? TV18 and Network18. RIL to, thus, infuse Rs 17 bn at the minimum into the promoter entities of Network18 Media and Rs 40 bn at the outside (assuming the rights issue is completely unsubscribed by all minority shareholders).

? Deal provides exclusive content for RIL?s 4G broadband rollout this year.

? RIL already runs a 50:50 JV with sports marketing outfit IMG. Has access to basketball (Basketball Federation of India) and soccer (All India Football Federation)

? Owns IPL team Mumbai Indians

The deal will have far reaching consequences on the media industry, considering that it marks the serious entry of one of India?s largest business house. ?Implications will spread over editorial integrity, business practise, competitive intensity and also structural growth of the industry. One does not rule out the tendency to grab market share in a weak regulatory environment,? says a senior fund manager of a leading media sector investing firm who id not want his name to be revealed.

Minority shareholders may be hard to convince to subscribe to the rights issue because they will have to pump fresh funds of Rs 23 billion for their holding (which at today?s closing price was worth Rs 8.3 billion), across both the companies.

One media analyst is even fearing a possible delisting of the two companies. ?Assuming that no minority shareholder subscribes to the rights issue, the promoters of Network18 and TV18 will pump in Rs 40 billion in both the companies. This will amount to their stake going up to 90 per cent in Network18 and 86 per cent in TV18 Broadcast. We will not be surprised if the promoters plan to delist these companies in such a situation,? says a media analyst at a local broking firm.

Helped by the easing of debt, Bahl will have to shift focus and turn the companies profitable. For the six-month period ended September, Network18?s consolidated revenues stood at Rs 7.89 billion with an operating loss of Rs 620 million and net losses of Rs 1.34 billion. TV18 posted consolidated revenue of Rs 5.68 billion with an operating profit of Rs 310 million and a net profit of Rs 130 million.

A representative act has been the offloading of 500 movies to Star India for around Rs 4.5 billion. Analysts are happy that the movie channel launch has been deferred. Bahl also feels the deal will help subscription revenues, crawling at this stage, take a giant leap forward.

With the backing of a strong investor, it needs to be seen whether TV18 Broadcast would enter the Sports genre to complete the only missing link in its TV portfolio enabling it to effectively compete with the likes of Zee and Star Network.

(With inputs from PRACHI SRIVASTAVA)

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TV18 to snap up ETV, plans rights issue

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