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MEDIA CONSOLIDATION: FORWARD STRATEGY
A field ripe for the picking
The push towards consolidation and digitization will help the TV industry in India to turn around their current losses and move towards a profitable future.
Issue Date - 15/03/2012
 
The media industry - in particular the players in TV broadcast and distribution domains - is currently engaged in pushing towards digitisation and creating more touchpoints for mobile access and dynamic content. This calls for huge cash reserves in order to reach key audiences amidst an increasingly digital environment. But a majority of media companies in India, though vibrant and gutsy, are starved of technology, marketing, and capital to expand. One way they can get the financial wherewithal to grow and acquire new technologies is by entering into strategic M&A deals. Analysts say that the media sector is now open to more mergers and acquisitions and there have been quite a few media deals ŕ la the Network18-Reliance transaction in recent times. According to analysts tracking the media sector, recent deals like the Mukesh Ambani-led Reliance Industries buying into Network18, NDTV’s stake sale to chemicals firm Oswal and Walt Disney’s buyout of Ronnie Screwvala-controlled UTV Software - all point to a gradual consolidation taking place in the industry.

The consolidation trend has been picking up because most media firms in the TV space, which constitutes about 40% of the roughly Rs 700 billion Indian entertainment and media industry, have not been making money and are looking for ways to positively turn around their businesses - either by bringing in a strategic investor or cashing out to larger players. Most TV channels are losing money and so is the case with DTH operators and cable guys. Network18, which has an accumulated debt of Rs 19.82 billion, reported a fourth straight quarterly loss of Rs 858 million in the three months ended December 31. Similarly, direct-to-home TV services provider Dish TV posted a net loss of Rs 442.8 million for the October-December quarter this fiscal. Another prominent media player UTV Software Communications posted a net loss of Rs 961.99 million for the third quarter.

For companies like Network18, NDTV and UTV, who have all sold stakes to bring in strategic investors, their recent losses could soon be a thing of the past if they marshall and husband their new resources well. Analysts aver that consolidation of media assets in the same market helps bring down costs and enables businesses to become profitable. For instance, broadcaster NDTV has been consistently narrowing its losses ever since the company sold its stake in entertainment channel Imagine to Turner International in February 2010. It narrowed consolidated losses to Rs 311 million at the end of June 2010 compared to the Rs 830 million it had posted in losses during the corresponding period last year. For the third quarter of this fiscal, NDTV reported a net loss of Rs 60.5 million as against Rs 148.4 million in the year-ago period. Since its stake sale to Turner, NDTV has gone further down the consolidation path by bringing in other outside investors as well and would surely be hoping to turn profitable soon.

As with TV broadcast companies, DTH players too are likely to embrace consolidation, especially after the government-mandated digitisation rules kicking in. Late last year, Parliament cleared a Bill for ushering in complete digitisation of cable television in the four metros by June 30, 2012. By the end of 2014, the entire country is expected to have phased out analogue cable TV. The television distribution network in India currently caters to around 140 million television homes, over 60% of these in the analogue category, while digital cable service is fed to a measly number of 4.5 million television homes. There are around 50,000 local cable operators (LCOs) and 1,000 multi-service operators (MSOs) and about 10 of these are major MSOs.

 
As per latest industry data, about 78.5% of cable & satellite (C&S) homes in India are connected through analogue cable while the rest are connected through DTH/ digital cable, which provides a near monopoly power to the analogue cable in terms of last mile connectivity. Once the digital implementation begins, gradual consolidation of LCOs is inevitable. As a result, industry profits and value will move to centralised distribution platforms and broadcasters. According to a recent report put out by Media Partners Asia, the valuations for cable and pay-TV operators in the US, Korea and Taiwan during their high growth value stage typically averaged 12-16 times one year forward. EBITDA, rather than the current trading average of 9-10x for India’s listed cable and pay-TV companies. The report points to similar or higher valuations for India’s operators, subject to successful execution of their digital networks.

Another research report by IDFC Securities, says that the regulatory trigger for digitisation will change the TV distribution industry dynamics in the coming days. The report further points out that as a result of both MSOs as well as DTH players capitalising on the mandatory digitised environment, the gains will be far sharper for nationalised MSOs such as DEN and Hathway. “Against a backdrop of extremely poor execution and muted subscriber addition of less than 0.5 million subscribers annually, we now foresee a near three-fold jump in digital subscriber addition for these MSOs in the next 12-18 months,” the report forecasts. However, the ambitious digitisation plan comes with a hefty price tag. Sector regulator Trai estimates that Rs 150 billion will be needed to upgrade cable networks to a basic digital format and an investment up to Rs 640 billion would be needed to shift to the high-tech platform prevalent in developed countries. “Big capital will be needed for creating better infrastructure for digitisation. However, what will facilitate this movement is further consolidation in the sector, which will provide scale that’s needed for attractive investments,” says Simon Twiston Davies, Chief Executive of Cable and Satellite Broadcasting Association of Asia.

Buoyed by hopes of profitability arising out of the digitisation rollout and its implementation, DTH players are looking to reposition their business in the hope of garnering profitability in the future. The prevailing sentiment is to consolidate now so as to get a better valuation tomorrow and be in a position to tap into profitability. Which is why Videocon DTH is said to be looking for partner to offload a part of its stake in its DTH business. Though the company has so far refused to confirm any such development, the industry is abuzz with news that Videocon is close to selling a 25% stake in its DTH services business for roughly $75 million to $100 million and is in talks with private equity firms. “The TV distribution business is a high investment play, much like the infrastructure sector, where the returns take longer to come. So if business is not doing well, players will look to consolidate so as to drive in some kind of profitability going forward,” says Timmy Kandhari, Leader (entertainment & media practice) of consulting firm PricewaterhouseCoopers India.

          

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