August 2010
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Media Deals : A cautionary tale


MUMBAI: Reliance Communications acquires Digicable in an all-stock deal. Media conglomerate CBS inks deal with Reliance Broadcast Network to launch general entertainment channels in India. Bloomberg UTV gets Reliance Capital to take 18 per cent stake while Bloomberg awaits for FIPB nod to pick up 15 per cent in the business news channel. Zee Entertainment Enterprises Ltd (Zeel) snaps up Hindi general entertainment channel 9X.


These are just a few deals concluded over the last three months, indicating a new wave of activity that could heat up the media and entertainment sector after a phase of lull and hard restructuring.


"Media companies need a lot more scale. The only way to grow bigger is to have a strong push towards inorganic growth. We are seeing this happen a lot more in the cable TV segment," says Den Networks chief executive officer Anuj Gandhi.


The acquisition viral is spreading across various segments: broadcasting, cable TV, DTH and film exhibition.


"Consolidation has a long role to play as the biggest issue confronting the M&E sector is size and scale. The different segments of M&E are, of course, in different growth phases and have different requirements," says PVR Cinemas chief financial officer Nitin Sood.


There is one big change, though, and deal-makers are not ready to throw plenty of cash around. Valuations are more realistic and the 'land-grab-at-any-cost' attitude is over.


The Digicable deal is in many ways reflective of the cautionary mood. Reliance makes an entry into the cable TV sector but does not part with cash as it creates a new entity that will house its direct-to-home, IPTV and retail broadband businesses. The evolution of this company will be closely watched as it taps the market with a public float in future.


God knows how the distribution map will shape up in India. Will cable merge with DTH to create mammoth entities? Or will Comcast and the multinationals step into the Indian market to create cable giants?


"We will see smaller deals dot the landscape now. But bigger deals are bound to happen in the next five years. The M&E sector can only grow through mergers and acquisitions," says Gandhi.


Media companies are not comfortable in doing large-sized deals yet. Zeel, for instance, acquired 9X as it gave them a tax benefit.


"Deals will happen as several companies run out of cash. Obtaining cash from the external market will be difficult for many players. New ventures will find it almost impossible to raise capital from private equity. The bigger media companies have a distinct advantage," says Zeel EVP corporate strategy and business development Atul Das.


Market leader Dish TV showed how it could raise capital after building scale in the DTH business. In late 2009, US-based Apollo Management took an eleven per cent stake in Dish TV for $100 million.


"The environment is not conducive to attract foreign investments into the media sector. In India there is very little transparency and the regulatory policies take their own sweet time. Investors no more look at virtual business models but the robust systems that you have built," says Dish TV managing director Jawahar Goel.


The DTH sector will see private equity participation once companies amass volumes. Reliance Big TV, for instance, could not attract investors at the value it wanted as it progressed as the fifth DTH operator - lagging behind Dish TV, Sun Direct, Tata Sky and Airtel digital TV.


In the film exhibition business, there is a renewed interest in stitching deals. The appetite is evident from the controversial acquisition of Fame by Inox Leisure and the aborted effort of PVR to gobble up DLF Group's cinema business.
Says Sood, "In the film exhibition business, where there is an organic growth of 30-40 per cent, companies will look to fast track and grab acquisition opportunities that will ensure a 70-80 per cent growth chart. They will have to acquire larger presence and be at least 1000-screen operators. Private equity and financial institutions will be willing to fund such acquisitions."


Media companies will also have to do a lot of repair work, fix their core segments, and get rid of flab. NDTV, which expanded from broadcast news to entertainment television, had to beat a hasty retreat. Avoiding a heavy cash burn rate, it sold the Hindi general entertainment channel NDTV Imagine to Turner as NBC Universal refused to make additional investments.


Network18 founder-promoter Raghav Bahl is busy restructuring his media empire. Viacom18, the joint venture between media conglomerate Viacom and IBN18, is set to acquire Network18's 80.4 per cent stake in AIM-listed The Indian Film Company (TIFC).


Media companies will have to redraw their plans as they move from a situation of abundant to scarce capital. "We lived in an era when green ventures like 9X and NewsX could find private equity capital. Those days are over. There is foreign interest in India but crazy deals won't happen for some time at least," says the head of a broadcasting company who did not want his name to be revealed.


Multi Screen Media (formerly known as Sony Entertainment Television India) believes there is enough room left for organic growth. "We are not looking at any deals actively now. We will make moves at the right time," says MSM chief operating officer NP Singh.


In 2009, Sony Pictures Television International acquired Bengali movie channel, Channel 8. MSM's aggressive plans to enter into the other regional markets, however, have been put on hold.


In certain crowded markets, the only way to enter is via acquisitions. Star India, for instance, snapped up Asianet Communications to get a strong foothold in the Kerala market.


"In the southern region, a better way to enter is through acquisitions. Media companies have blocked out movies. If you want to be in the general entertainment space, you can't launch channels without movie content," says Maa TV Network chief executive officer Sharradh Marar.


Production houses in India write a different script and sit with no acquisitions in mind. "There aren't many production firms with size. So it is hard to do deals," says Balaji Telefilms group chief executive officer Puneet Kinra.


Even global content firms aren't ready to take the growth route through acquisitions. "We are not out there shopping. Our focus is to supply more and more content to television channels in India," says FremantleMedia India managing director SK Barua.


Private FM radio companies are seeking profitability models before they can march into bigger deals.

Says ENIL chief executive officer Prashant Panday, "Our focus should be on building the economic health of the sector before asking for a higher FDI (foreign direct investment) cap. If the Trai recommendation of 26 per cent FDI limit is accepted by the government, we should logically be allowed to broadcast news. This will help the sector grow."

 
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