Networking a way out

What’s behind the Network 18-Reliance Industries strategic deal?

Couched comfortably in his leather bean bag at his plush, South Mumbai office, the former head of a leading television channel scrolls down innumerable analyst reports on the recent Reliance-TV18 deal on his iPad and declares that it is Mukesh Ambani who will now call the shots at the ₹2,500-crore Network18. “Ambani has pulled off a huge coup,” he says.

But you won’t hear Raghav Bahl complaining. The promoter of Network18 has smartly, and at a very opportune time, wriggled out of the financial troubles of the group, only to integrate Ambani’s other media property that has only been on a losing streak ever since the Reliance Industries chief  bought that stake for considerations other than purely commercial. 

For the uninitiated, TV18 has recently acquired a partial stake in the television business of the Hyderabad-based Eenadu, for ₹2,100 crore, from Reliance Industries, which had invested in the company back in 2008 for ₹2,600 crore. TV18 will acquire a 100% stake in the five regional news channels of ETV (ETV MP, ETV UP, ETV Bihar, ETV Urdu and ETV Rajasthan), where Reliance has a 100% stake. It will also acquire a 50% stake in Eenadu’s five regional entertainment channels (Marathi, Bengali, Kannada, Oriya and Gujarati), where Reliance owns a 100% stake. Further, it will acquire a 25.4% in ETV Telugu and ETV Telugu News, where Reliance currently owns a 49% stake (the remaining 51% is with Eenadu promoter Ramoji Rao).

Now comes the tricky part. While Reliance is selling part of its stake in Eenadu to TV18, Reliance itself is funding the debt-ridden TV18’s bid to fulfill its regional ambitions. TV18 plans to fund this acquisition through a rights issue, where TV18 and the holding company, Network18, plans to raise ₹2,700 crore each. By this, the company should be able raise roughly ₹4,000 crore (assuming the rights issue isn’t fully subscribed). Reliance Industries will fund the promoters for the rights issue through a trust called Independent Media Trust, in the form of optionally convertible bonds. Reliance will also infuse ₹1,700 crore into Network18. 

It’s highly unlikely that Ambani won’t have a larger game plan in mind considering he’s sinking such a huge sum into the media house, albeit indirectly. As for Bahl, his innings is coming to an end, industry observers reckon. In FY11, TV18 had posted a loss of ₹70 crore and debt of around ₹1,400 crore on a topline of ₹2,500 crore. Sure, it will use some of the money raised through this labyrinthine deal to repay some debt, but it ends up with an expensive asset on which it won’t be easy to make money for many years. “This is a prime example of destruction of shareholder value,” says the unnamed media veteran. He wonders if Bahl holds more than 10% share in the company, although on paper he still owns the majority stake.

Former Star India CEO Peter Mukerjea, who is now a mentor to several cross-media professionals, calls the deal a marriage of convenience between an ugly bride and a physically challenged groom. “One was deep in debt and needed to get cash into the business quickly and the other was sitting on an asset they purchased some years ago but were not able to monetise. Structuring the deal this way provides an escape hatch for both. I guess they both will live happily ever after — or will they?” 

The “ugly bride” here is obviously Eenadu. According to an IDFC report, Ushodaya Enterprises, the holding company of Eenadu Network, has posted a loss of ₹60 crore in 2010-11. None of the 12 channels of the network is doing well; even ETV Telugu and ETV Telugu News, the flagship channels, are a distant No.3 and No.5 in their respective genres with channel shares of  19.9% and 9.2%, respectively. In contrast, market leader Gemini TV has a 40.3% share in the Telugu entertainment genre, while TV9 Telugu is the leader in the news genre with 20.7% market share, according to TAM Media Research (See: Losing the plot).

RIL’s argument is that this deal will allow its proposed 4G platform access to quality content from this huge network of 22 channels (post the Eenadu acquisition; Network18 originally had nine channels). But that’s a tad too simplistic. After all, RIL needed to only buy content, not the content provider. 

While no one seems to doubt that Ambani has a larger agenda, there’s no official information — or consensus in conjecture — on what it could be. Meanwhile, theories abound. Ambani’s reviving his media ambitions (which, along with Reliance-owned newspaper Sunday Observer, had been discarded in the 1990s) and RIL will use these channels as its personal PR platform, goes one school of thought. A former CEO of a leading media buying agency sees this investment as a larger strategy in preparation for the elections. Ambani’s pro-Congress leanings are well known. “If you have a consolidation of networks supporting you when elections are round the corner, it helps,” he points out. That idea dovetails nicely with another possibility: that RIL’s come on board Network18 to further build its clout with the government. “No government can afford to antagonise a media house that owns such powerful channels,” says Ashutosh, COO, CellCast. 

Mukerjea sticks his neck out a little more, suggesting Ambani’s bought the business for his children, since media is a “cool” business for the younger generation. “What better present for the young scion to inherit and then, over time, to combine the cricket team and the sports management interests and, perhaps, even Anil Ambani’s TV channels and radio stations.” That’s a scary thought, especially for those in the business.

An overpriced deal 

Ambani’s motivations aside, what prompted TV18 to pay a staggering ₹2,100 crore for a partial stake in Eenadu when the company’s total revenue last year was just ₹525 crore? And this when Bahl is believed to have trashed a similar proposal in 2010, saying ₹2,500 crore for the entire company was unviable. “He agreed to this current deal only because it was an equity swap,” says a Network18 insider. Bahl’s ambitions of a huge network of channels, with considerable presence in the regional category, is well known.

But given its precarious finances, such a huge payout for a bouquet of regional channels that aren’t performing too well is unfathomable. Indeed, until the deal with RIL, Bahl had been treading cautiously, even shelving plans of launching some channels under Viacom18 (a 50:50 JV between Network18 and Viacom), such as the movie channel. In fact, since the channel didn’t take off, Viacom18 is known to have sold its movie library to Star India, for ₹500 crore.

As Outlook Business went to print, TV18 was known to be in talks with Viacom to buy out the remaining 50% of Ambani’s stake in Eenadu’s entertainment business. “However, Viacom is not very keen on picking up the stake as it is over-priced,” reveals a former employee of Viacom.

A daunting task

According to a report by IDFC, the regional broadcasting industry is pegged at ₹3,000 crore (including Tamil Nadu, where Eenadu doesn’t have a presence). Eenadu operates in a particularly cluttered environment, with five to six channels in each genre. Eenadu ranks third or fourth in most markets. Under such circumstances, points out the report, the competitive intensity for each player would be, at best, a market share of 15-20%. So, it concludes, the opportunity size for ETV will be nothing more than ₹600 crore. “For TV18 shareholders to generate an optimal RoE of 15% from the transaction in the next five years, ETV Network would need to garner a net profit of ₹550 crore plus (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,” points out Nikhil Vora, managing director, IDFC. 

Sure, the idea behind offering a bouquet of channels is to have a better bargaining power with advertisers. “If you have a variety of channels to offer advertisers, you become a network to reckon with,” points out Punitha Arumugham, CEO, Madison Media. Advertisers, too, prefer networks if they’re seeking a national and regional audience. But this is where ratings become critical — over 60% of the revenue for regional channels comes from advertising. For instance, in West Bengal, ETV Bangla was No.1 until Star and Zee launched their regional offerings in that market in 2007-08.

Now, the channel has slipped to the No.3 position and, consequently, ad rates have dropped around 20% in the last three or four years. This is the case with most of the Eenadu channels. So where Network18 may get advertisers on a standalone channel like Colors (which has some of the highest-rated shows), it may find it tougher to effectively leverage the Eenadu network. “The regional markets space has intense competition. In recent times, ETV lost its edge on some of its channels. It has to effect a turnaround to earn a decent return on investment,” says Sunil Lulla, managing director, Times Television Network. If Network18 is to monetise the Eenadu network, it will have to invest in improving the content of the channels . That won’t come cheap, but with RIL pumping in money, perhaps Network18 will think it worth the effort.

Raghav Bahl has had his time in the limelight. Watch this space to see who’s next.