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)

Also Read:

Mukesh Ambani?s big media bet

Mukesh Ambani forays into media via TV18

TV18 to snap up ETV, plans rights issue

Reliance Industries in deal with TV18 Group?

MUMBAI: In a swift move, India?s richest man Mukesh Ambani marks his entry into the media business.

Ambani-led Reliance Industries (RIL) said Tuesday it will invest in Raghav Bahl-promoted Network18 Media & Investments and TV18 Broadcast through an Independent Media Trust.

As per the deal, the subsidiary will fund promoter entities of the TV18 group to subscribe to rights issues. In return, it will get access to content from TV18 group for its 4G broadband network that Reliance is all set to roll out this year.

Bahl will continue to retain management and 51 per cent control over the two media entities.

Meanwhile, boards of both -- Network18 and TV18 -- have approved rights issue of Rs 27 billion each. 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.

Meanwhile, 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 14 billion of the rights Issue of TV18.

The net aggregate rights issue of both Network18 and TV18 will result in a fund raising of Rs 40 billion.

The current promoter entities of Network18 will acquire shares worth Rs 17 billion of this rights issue, for which they have entered into an arrangement with RIL?s trust.

"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.

Meanwhile, TV18 will acquire the TV business of the Eenadu Group.

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 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.

TV18 also has an option to buy the balance 50 per cent interest in ETV non Telugu GEC channels and additional 24.50 per cent interest of ETV Telugu Channels.

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, TV18 said.

After the deal, on a combined basis, TV18 will be offering a mix of national and regional channels catering to diverse genres like Hindi and regional entertainment; general news in English, Hindi and regional languages; business news in Hindi, English and regional languages; music; kids; devotional and infotainment channels.

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 (?Infotel?), 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.

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.?

"Further, on a debt free basis, both Network18 and TV18 hope to strengthen their position in various media segments like news and entertainment broadcasting, consumer internet, digital and print publications, filmed entertainment, home-shopping, e-commerce and other emerging businesses."

On the news, both Network18 and TV18 stocks ralled and hit the upper circuit in the early hours of trading on the BSE. While Network18 scrip closed at Rs 46.4 per share, TV18 closed at Rs 33.70 per share on Tuesday.

Also Read:

Mukesh Ambani?s big media bet

TV18 to snap up ETV, plans rights issue

Reliance Industries in deal with TV18 Group?

MUMBAI: Raghav Bahl- promoted Network18 Media and Investments? share price went up almost 20 per cent on Tuesday amid media reports that Mukesh Ambani is looking to acquire a stake in the media conglomerate.

The Network18 scrip touched an intraday high of Rs 43.35 per share, before closing at Rs 37.70, or 4.29 per cent higher than the previous close on the BSE.

Earlier, media reports suggested, quoting sources, that Mukesh Ambani, either in his personal capacity, or via Reliance Industries, is going to acquire stake in Network18. The reports also said that one of the options being considered was for Ambani to take a minority stake in Network18 and then combine the latter with Eenadu TV (ETV).

However, Network18 has issued clarifications on the news. It said that currently it has not concluded any agreement in connection with any proposed investment. ?The company have not commented on the news item as it is the policy of the company not to comment on any rumours or speculative news,? it said.

MUMBAI: Raghav Bahl-promoted TV18 may offload 10 per cent of its stake in Viacom18 to its joint venture partner, Viacom.

With this, TV18‘s stake in the joint venture will come down to 40 per cent. Viacom18 runs general entertainment channel Colors, youth channel MTV, kids channel Nick and also houses Viacom18 Motion Pictures.

"TV18 may exercise its option to dilute 10 per cent in Viacom18," a source familiar with the development said.

Bahl could not be contacted for his comments till the filing of this report.

TV18 has a put option in Viacom18 exercisable from 1 July 2012. The put option gives TV18 the right to sell 10 per cent of the company to Viacom each year for a period of five years.

TV18 can retain management control till it retains 40 per cent or more in Viacom18.

Viacom18 had posted a net loss of Rs 284 million for the second quarter of the fiscal ended 30 September 2011. Ebitda loss was at Rs 77 million.

For the full fiscal ended 30 March 2011, Viacom18 had posted a net profit of Rs 850 million. The income for the fiscal was at Rs 11.04 billion, while expenses were at Rs 9.85 billion. Ebitda for the fiscal was at Rs 1.20 billion.

TV18 has a net debt of Rs 6.84 billion as of 30 September.