Recent deals point to consolidation in media, say experts

05 Jan,2012

By Ravi Teja Sharma & Meenakshi Verma Ambwani

 

Purveyors of news are rarely objects of news themselves, but India’s splintered media landscape has made news in the past two weeks. A flurry of deals or talk of more similar transactions have stirred up the sector in recent days, putting the spotlight on the possible motivations and some crystal ball gazing on what lies ahead.

 

Last week saw a little-known chemical and fertiliser company Oswal Green Tech buying a 14.17per cent shareholding in New Delhi Television (NDTV) through two block stock market deals. Media reports said Mukesh Ambani-controlled Reliance was looking at buying into Network18, which runs CNBC India. Before him, younger brother Anil’s firm Reliance Capital increased its shareholding in UTV News, which runs Bloomberg TV, by buying out UTV founder Ronnie Screwvala’s 66 per cent stake.

 

Industry executives and experts believe the consolidation trend will pick up momentum in 2012, separating the men from the boys in this highly splintered sector that is being increasingly hobbled by cost pressures and revenue challenges in a slowing economy.

 

With more than 700 television channels in India and only few making money, experts believe consolidation in the industry is inevitable.

 

“Consolidation has to happen. It is required,” said Mr Haresh Chawla, who recently announced his resignation as group chief executive officer of Network18 and Viacom18 after leading the company for more than a decade.

 

One major problem for the industry is that it has been too dependent on advertising revenues, while subscription revenues have been elusive.

 

Analysts say some signs of consolidation are already visible, as media companies cobble together bouquets of channels.

 

“It is already starting to happen and going forward, media companies will look at building a portfolio of broadcast assets across genres, geographies and languages to create a national setup,” said Mr Jehil Thakkar, head of the media and entertainment practice at KPMG.

 

The move towards regional channels, spread across geographies and genres, is triggered by the high growth in advertising revenues in the segment. Growth in advertising revenues in big cities has been around 12-13 per cent even in good times because of an inventory overhang, while regional advertising has been growing at more than 20 per cent for the last few years, say analysts.

 

Analysts say this could explain why Network18 may be looking at Eenadu TV. “Network18 does not have any regional channels in its portfolio. This move will give them an entry into the fast growing regional market,” said one analyst. Buying Eenadu TV could give Network18 a bouquet of 11 regional channels.

 

What may also be attracting new investors such as the Ambanis and foreign media companies such as Walt Disney is the promise of higher revenues and growth as the full benefits of digitalization kicks in. Collateral benefits of media ownership include access to content sources to power non-media business and potentially even some influence.

 

In the case of Reliance Industries, which is setting up a national 4G broadband service, ownership of a media company will give it an edge over competition, with access to exclusive content from a bouquet of channels as well as web properties.

 

The Cable Television Network (Regulation) Amendment Act, enacted two weeks ago, could help subscriptions finally become a good source of revenues for media companies, reducing their dependence on advertising. Today, a viewer pays as little as 50 paise to watch an hour of TV. Even this revenue does not reach the channels completely because of under-reporting by local cable operators.

 

“This (the digitalisation law) will be a game-changer for the television business if well executed,” said Mr Sunil Lulla, managing director and chief executive officer of Times Television Network, which runs Times Now, ET Now and Movies Now channels.

 

Meanwhile, some deals have already happened in the non-news segment, in anticipation of large changes in the sector. In July this year, Walt Disney Co said it is buying out rest of the 49.56 per cent stake in UTV Software Communications that it does not own from public shareholders and other promoters of the company for Rs 2,000 crore.

 

“There is clearly a need for sellers to look at strategic investors. For the buyers, in the long term there is value in Indian media,” said Mr Nikhil Vora, managing director and head of research at IDFC Securities.

 

India’s entertainment and media industry is estimated to grow at a compounded annual rate of 13 per cent to Rs 1,19,890 crore in 2015 from Rs 64,600 crore in 2010, PwC’s India Entertainment and Media Outlook for 2011 revealed earlier this year.

 

The sector’s woes, notably because of high costs and low subscription revenues, coupled with the general weakness in the markets have cast a dark shadow over media stocks. The market value of NDTV stood at Rs 171 crore on December 21, 2011, the day Oswal Green Tech, formerly Oswal Chemicals & Fertiliser, acquired its stake for around Rs 24 crore.

 

The company was worth Rs 215.66 crore on January 3, 2012, Rs 552.5 crore at the beginning of 2011 and Rs 3,300 crore at its peak in January 2008. Network18’s market value has dropped from Rs 1,540.7 crore on January 1, 2011, to Rs 535 crore as on January 3, 2012, while that of TV18 has dropped from Rs 2,122.4 crore to Rs 1,220.13 crore in the same period.

 

The sector trades at price earnings multiple of 18.3 compared with nearly 19 for the telecom sector or 21.43 for the technology sector.

 

While digitalisation will help increase subscription revenues and remove capacity constraints, it will also aid the process of consolidation in the sector by forcing smaller regional channels into the embrace of larger, pan-India players. Smaller regional channels are enjoying better advertising growth today, but after digitalisation they could face problems in getting themselves well placed in the line up of channels and may feel the need to be aligned with larger players either by selling out or through a distribution deal.

 

“Larger players with a bouquet of channels will have more bargaining power with cable operators. Smaller channels will find it difficult to get into prime tiers,” said Mr Chawla.

 

With valuations low, experts feel now may be the time for consolidation. “The overall multiples for media companies have been low for a while. This is a good time to buy. Broadcasting does present a good opportunity,” said Mr Thakkar.

 

Source: The Economic Times

Copyright © 2012, Bennett, Coleman & Co. Ltd. All Rights Reserved

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