Ending months of speculation, Anil Ambani-controlled company Reliance Capital announced the exit from the general entertainment TV business and partial sale of the radio business under Reliance Broadcast Network (RBNL). While Zee Entertainment Enterprises (ZEEL) will buy the TV business, the news media company Zee Media Corporation (ZMCL) will pick up 49 per cent in the radio business.
The total transaction value is just under Rs 1,900 crore. Of this ZMCL will pay Rs 1,592 crore for the radio business, while ZEEL will pay Rs 298.4 crore for the TV business.
Due to regulatory constraints, ZMCL will currently be able to acquire only 49 per cent in the radio business. Under the radio auction regulations, the lock-in period for a company acquiring frequencies is three years from the date that the last acquired becomes operational. The lock-in period for the 45 existing frequencies is till March 31, 2018, and for the 14 frequencies acquired in the phase-3 of radio auctions last year, is expected to be up to March 2020.
Consequently, RBNL will transfer the 45 operational FM channels and 14 new, non-operational channels into two special purpose vehicles (SPV) Vrushvik Entertainment Pvt Ltd (VEPL) and Azalia Media Services Pvt Ltd (AMSPL), respectively. ZMCL will acquire 49 per cent stake in each SPV. Both Zee and Reliance group will also have a call/put option for the balance 51 per cent stake in both the SPVs after the stipulated lock-in period.
For the entertainment TV business, Reliance will demerge the two channels, Big Magic and Big Ganga, and four other TV licences and merge into ZEEL.
“Big FM and ZMCL are operating in markets that complement in each other. This will help unlock new potential for retail advertisers in the given market and will ultimately mean new revenue (streams) for us. This is will help margins,” said Rajiv Singh, chief operating officer, ZMCL.
Reliance Capital will reduce debt from the proceeds of the sale. “This transaction is part of our strategy to reduce exposure in non-core business of media and entertainment and work towards further reducing our debt under Reliance Capital,” said Sam Ghosh, executive director and Group chief executive, Reliance Capital.
ZEEL faces a regulatory hurdle when it comes to the radio business in India as a firm with more than 49 per cent foreign holding is not allowed to own and operate private FM channels in the country.
“We are pleased to announce this acquisition which further adds to our expanding universe of general entertainment channels. I am confident that these two channels will make the Zee Network channels more enriching for the audience and for the Company”, said Punit Goenka, MD, ZEEL. Big Magic is a comedy channel catering to Hindi Speaking Markets while Big Ganga is a Bhojpuri entertainment channel, catering to audience in Bihar, Jharkhand and Purvanchal.
Analysts have cheered this deal (valued at 3.6 times FY16 EV to sales) and believe it will help ZEEL ramp up its regional presence. Abneesh Roy, media analyst, Edelweiss Securities, says, “It’s a good deal as it gives ZEEL entry in Uttar Pradesh, Bihar and Jharkhand markets. With this buyout, ZEEL has also got a specific Hindi comedy channel in UP, Bihar. I expect ZEEL to continue to make such acquisitions to fill up the gaps in its portfolio.”
Notably, ZEEL had acquired an Odia channel couple of years back and had also ventured into Tamil Nadu on its own.
A key concern is that the TV channels business posted Ebitda loss of Rs 236 crore in FY16. Given ZEEL’s track record of keeping content costs under tight control, analysts believe the company can achieve a turnaround in the medium term. The company can leverage on its existing sales force to sell these channels. Also, as it strengthens its bouquet of channels, ZEEL’s advertising revenues as well as subscription revenues will improve.
Given its smaller size, the deal will not impact ZEEL scrip meaningfully. The radio deal will boost profitability of ZMCL given that the acquired business enjoys higher margins. For the first half of this fiscal, 92.7 posted Ebitda margin of 40.8 per cent while that of ZMCL stood at 19.5 per cent.
ZMCL plans to leverage the synergies for content generation in genres like infotainment, sports by employing a cross platform strategy for content. For news, it plans to use the All India Radio feed as and when required. Big Events has a portfolio of awards etc also which will enable ZMCL to increase its brand visibility.
However, ZMCL plans to fund this deal by taking loans of Rs 700 crore and corporate guarantee of about Rs 1,000 crore. This will be a concern as it will push up the company’s debt-equity ratio which stood at 0.7 times in FY16.