February 2012

TV18 - RELIANCE - ETV


Reliance Industries' Mukesh Ambani has always wanted to be a player in media and television space. Years ago, after the 2 Ambani brothers split and carved out their own empires, Anil assumed the media businesses and the separation pact forbade Mukesh to dabble in media and entertainment. At that time unproven rumours speculated that Peter Mukerjea's (failed) 9X channels were bank rolled by Mukesh Ambani.

Over the past 2 decades, Raghav Bahl has established a huge scalable media empire ranging from TV channels to a strong presence on the internet. The business is professionally run, but some observers feel that its emphasis on growth and scale, has resulted in no profitability. Debts have risen continuously. Bahl wanted to tap the markets for even more capital through a Rights Issue to fund growth, but funds are hard to come by, due to mounting debts. As of September 2011, Bahl's companies had an accumulated debt of Rs. 1,430 Crore.

For the 6 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.

Clearly Bahl's companies were ripe for a takeover by a cash rich investor.


THE TV18 & NETWORK18 ASSETS

The Network18 Group is a media conglomerate with interests in television, internet, films, e-commerce, magazines, mobile content and allied businesses.

Through its holding in 'TV18 Broadcast Ltd.' the group operates business news channels - CNBCTV18 and CNBC Awaaz, general news channels - CNN-IBN and IBN 7, and IBN-Lokmat, a leading Marathi regional news channel in partnership with the Lokmat group.

'TV18 Broadcast' also operates a joint venture with Viacom, called Viacom18, which houses TV channels - Colors, MTV, VH1 and Nick - and Viacom18 Motion Pictures.

For TV distribution, the group has established a strategic alliance with Sun Group, SUN18, one of the biggest distribution entities in the market.

The group has also moved into the factual entertainment through AETN18, a joint venture with A+E Networks (formerly A&E Television Networks) which operates History, Bio, Crime & Investigation Network and Lifetime.

Network18 Media & Investments Ltd. operates its digital, publishing and ecommerce assets including Web18 which houses moneycontrol.com , ibnlive.com, in.com and firstpost.com & ecommerce property HomeShop18; bookmyshow.com, and Forbes India magazine. Through 'Network18', the group operates Newswire18, a real time financial information and news terminal service, and Infomedia18 a special interest publishing company; E18 an event management venture and Sport18, its sports management and marketing venture. 'Network18' holds a controlling interest in 'TV18 Broadcast' and investments in Yatra, DEN Networks and other Capital18 portfolio companies.



THE DEAL

On January 3, 2012, in a surprise move, Mukesh Ambani declared that he was taking a significant stake in Raghav Bahl-promoted TV18 Broadcast & Network18 Media & Investments. Mukesh Ambani set up a separate company -

Independent Media Trust to finance the acquisition. The investments have been made in through an intricate web of companies owned or controlled by Mukesh Ambani & Raghav Bahl, in a manner that does not require detailed public disclosure of the amounts transacted. Independent Media Trust will fund promoter entities of the TV18 group to subscribe to the rights issues. Bahl will continue to retain management and 51% control over the 2 media entities.

Boards of both - Network18 and TV18 - have approved rights issues of Rs. 2,700 Crores each. The net aggregate rights issue of both Network18 and TV18 will result in a fund raising of Rs. 4,000 Crore.

TV18 Rights Issue proceeds, at a price of not more than Rs. 40 per equity share, will be utilised to repay the existing debt, fund the acquisition of ETV Channels and fund working capital needs.

Network18 rights issue proceeds, at a price not more than Rs. 60 per equity share, will be utilised to repay the existing debt and subscribe to the Rs. 1,400 Crore of the rights Issue of TV18. The current promoter entities of Network18 will acquire shares worth Rs. 1700 Crore of this rights issue, which will be bank rolled by funds from Reliance's Independent Media Trust.


ANALYSTS ALARMED

Some analysts feel that minority shareholders may be hard to convince to subscribe to the rights issue because they will have to pump fresh funds of Rs. 2300 Crores against their current share value of Rs. 830 Crores!

One media analyst even fears a possible delisting of the 2 companies. "Assuming that no minority shareholder subscribes to the rights issue, the promoters of Network18 and TV18 will pump in Rs. 4,000 Crore in both the companies. This will amount to their stake going up to 90% in Network18 and 86% in TV18 Broadcast, raising the possibility that the promoters may even delist these companies.


RIGHTS SUMMARY

After the 2 rights issues, Network18 and TV18 will get Rs. 4,000 Crore net inflow

Of this, Rs. 2,100 Crore will be used to acquire RIL's shares in ETV.

Of the balance Rs. 1,900 Crore, Rs. 1,430 Crore (as of Sept 2011) will be used to retire the group's net debt. The group will be left with Rs. 470 Crore net cash for its operations and growth, turning around the company to a cash positive operation.

RIL, which had paid Rs. 2,600 Crore for the 3 businesses, earns Rs. 2,100 Crore by part-selling the television business, thereby making a neat profit - atleast on paper. (See Box On Eenadu TV - RIL Sale)

Ernst & Young (E&Y) acted as advisors for financial and tax due diligence and valuation of the assets. The legal due diligence was carried out by Khaitan & Co.


PRESS STATEMENT

"The promoter companies of Network18 and TV18 and the Trust have entered into a Term Sheet under which the Trust would be subscribing to the Optionally Convertible Debentures (OCDs) to be issued by the Promoter Companies. Reliance will leverage its deep understanding of the Indian markets-consumer insights, technological expertise, and the ability to build and manage scale, to make this a "win-win" partnership. This will create value and be accretive to the shareholders of RIL," RIL said in a press release.


TV18 GETS EENADU CHANNELS

As an integral part of the deal, Reliance will transfer most of its share in the Eenadu channels, to TV18. (See Table 1).



The TV18 board announced that the company plans to attain 100 per cent interest in regional news channels in Hindi namely ETV Uttar Pradesh, ETV Madhya Pradesh, ETV Rajasthan and ETV Bihar and ETV Urdu channel, 50 per cent interest in ETV Marathi, ETV Kannada, ETV Bangla, ETV Gujarati and ETV Oriya and 24.50 per cent interest in ETV Telugu and ETV Telugu News.

TV18 also has an option to buy the balance 50 per cent interest in ETV non Telugu GEC channels and additional 24.50% interest of ETV Telugu Channels. TV18 will have board and management control of ETV news channels and ETV non Telugu GEC channels. The board has approved an outlay of up to Rs. 21 billion for the acquisition.

After the deal, TV18 will become one of the largest broadcast networks in the country in terms of the channels owned and will also have one of the most robust balance-sheets among the Indian broadcast media companies. To this end, Bahl has yet again managed to seal a cracker of a deal.

Network18 founder, editor and MD Raghav Bahl said, "This is a truly seminal moment in the 18-year-old history of Network18/TV18. By inducting such a significant amount of equity, our Balance Sheets will become among the strongest in the industry. Also, by acquiring this strategic control over several ETV Channels, TV18 will have a bouquet of leading television channels. Riding on the imminent digital wave, I am convinced that this acquisition is a significant move which will catapult TV18 into the forefront of India's broadcasting industry."


TV18 CONTENT FOR RIL

As a part of the deal for acquisition of ETV Channels, Network18 and TV18 have also entered into a Memorandum of Understanding with Infotel Broadband Services Limited, a subsidiary of RIL. Under this agreement, the companies and their associates will have the right to distribute the content of all the media and web properties of Network18 and programming and digital content of all the broadcasting channels through 4th Generation Broadband Network of Infotel. Infotel shall have 'preferential' access to this content on a first right basis as a most preferred customer.

Some industry observers do not give much weightage to these rights. They term them as mere window dressing to appease RIL share holders.

The TRAI's regulations demand that broadcast content must be shared with all carriers on a non exclusive basis. So preference in getting access to content that is available to everybody does not seem to hold value.


BAD DEAL FOR RIL SHARE HOLDERS ?

The deal has been structured between entities that are not publically held. Hence they are not obliged to make a full disclosure. Indeed, it appears that the announcements made withhold more than they divulge. But then it can only be expected from shrewd businessmen like Mukesh Ambani and Raghav Bahl.

The projected story is that RIL is extending a loan of between Rs.1,700 Crore to Rs.4,000 Crore, to Bahl and his promoter group to help them get out of their massive debt & to fund TV18 to buy out RIL's existing majority stake in the Hyderabadbased Eenadu Group. If the transaction was indeed a simple loan by RIL to TV18, why did RIL set up a new company - Independent Media Trust - only to transact the loan?


RELIANCE & THE EENADU CHANNELS

Of late, TV channels have been embroiled in political controversy and allegations of money kick backs. Kalaignar TV and the 2G scam are a prominent example.

In 2008, Ramoji Rao, JM Financial and RIL structured a deal where RIL took ownership of the broadcasting business for Rs. 2,600 Crores & got 49% indirect ownership in 2 channels of the ETV Network (particularly ETV Telugu and ETV Telugu News) and 100% interest in the remaining 10 channels of the Group.

Reliance in turn is selling its interest in these channels to TV18, as mentioned in this article.

Little known is the fact that YSR's widow Y.S. Vijayamma (Vijayalakshmi) has filed a PIL in the high court against former Chief Minister Chandrababu and his allies, alleging links between Chandrababu and his friends like media baron Ramoji Rao who controls the Eenadu group.

The business dealings among the trio Mr Chandrababu Naidu, Ramoji Rao and Nimesh Kampani, a close aide of Mukesh Ambani of the Reliance Industries is being probed by investigating agencies.


Some industry observers feel that TV18 is paying an inordinately high price of Rs.2,600 Crore for the Eenadu TV channels. As a comparison Zee TV had acquired Zee News' regional bouquet for approx. Rs.1,300 Crore. Also the Eenadu channel purchase price represents an EV/Sales valuation of 6.3x compared to Sun TV's trailing EV/Sales of FY11 at 5.5x ( Sun TV has dominant viewership and higher profit margins) and ZEEL's EV/Sales valuation of 3.5x.

On the other hand RIL gets to show its share holders that it sold its pricy Eenadu TV acquisition for a profit!

The Eenadu channels being transferred to TV18 are predominantly news channels that yield low revenues. The non news Eenadu channels come with only relatively small stakes of 50% and 24.5%.

The entertainment channels in the Network18 bouquet (Colors, MTV & Nick) are housed under Viacom18, a JV with a foreign partner Viacom Inc, so not much benefit transfers from that bouquet.

Clearly the full meaning and purpose and implications of this transaction will unravel over an extended period of time, or never at all. n


Vijayamma has alleged in her petition that Chandrababu ignored advice tendered by senior officials and had not taken any measures to protect the state's interests while generating wealth for himself and for Ramoji Rao through his decisions. The petition alleges that Naidu granted exploration rights in the KG basin to the Reliance Industries owned by Mukesh Ambani who in turn helped on a quid pro quo basis Chandrababu Naidu and Mr Ramoji Rao in amassing wealth.

When Ushodaya Enterprises, owned by Mr Ramoji Rao and his family, was in need of Rs. 2,600 Cr to repay to investors, 2 associates of Mukesh Ambani had floated 6 companies in quick succession between December 2007 and January 2008 to help him come out of the crisis, she alleged. These companies were registered at the same address in Mumbai where Reliance has its corporate office.

Reliance Industries diverted Rs. 2,604 Cr to the accounts of the newly-floated companies and these companies bought shares of the Ushodaya at a whopping premium of Rs. 5,28,630 per Rs.100 share, even though the Eenadu group declared losses of Rs. 59 Crore!