Funded by RIL Trust, Network18 buys ETV channels — from RIL

First, a caveat: this deal is Complex, in capital  letters.

In essence, a buyer is acquiring stake from a seller, largely using money lent by the seller, even as he benefits massively from an announcement-led boost in share price.

Here’s how: Broadcaster Network 18 on Tuesday announced plans to acquire various channels (some fully, some partially) of ETV for Rs2,100 crore, using money lent by Independent Media Trust, which is promoted by Reliance Industries Ltd (RIL).

ETV, promoted by Hyderabad-based media baron Ramoji Rao, is also substantially owned by RIL through its investment vehicles.

Network18, with a market cap of Rs1,881 crore as of Tuesday, will make a rights issue of Rs5,400 crore (Rs2,700 crore each in group companies TV18 Broadcast and Network18 Media & Investments).

That would be a 19% and 30% premium, respectively, to the market price of those shares on Tuesday — and that too, after both shares surged 20% apiece.

Arithmetically, that’s a potential injection of Rs5,400 crore into the broadcast company. However, since Network18 holds a 50% stake in TV18, the net rights issue proceeds would be Rs4,000 crore.

While promoter Raghav Bahl & friends will inject as much as Rs1,700 crore to subscribe to the rights, the rest Rs2,300 crore will have to be brought in by other shareholders.

In case they don’t subscribe, the promoters will pick up that portion too — which, again, would be funded by the RIL Trust.
The maximum the trust will fund, therefore, will be Rs4,000 crore.

In return, the Network 18 companies will issue optionally convertible debentures to the trust, which should be convertible to equity in 2-3 years, according to analysts.

How much stake the trust ends up with post conversion is anybody’s guess.

Yet, after all this, Bahl, the promoter, editor and managing director of Network18, will end up with a majority stake because there will be an enormous equity dilution through rights.

At the rights issue valuation, the market capitalisation of Network18  surges to Rs7,700 crore. That’s a rise of 309% from Tuesday’s Rs1,881 crore — without a change in guidance on business prospects — other than the statement that the company becomes debt-free.

It currently has debt of around Rs1,400 crore.
RIL said it had invested about Rs2,600 crore in ETV channels for a substantial but undisclosed stake — and it will not be selling it all away.

TV18 would get 100% ‘economic interest’ in ETV’s regional news channels in Hindi including ETV Uttar Pradesh, ETV Madhya Pradesh, ETV Rajasthan and ETV Bihar and ETV Urdu.

TV18 would also get 50% ‘interest’ in ETV Marathi, ETV Kannada, ETV Bangla, ETV Gujarati and ETV Oriya.

A leading media player in Telugu, ETV also has a Telugu news channel and an entertainment channel.

TV18 would get 24.5% ‘interest’ in these two channels.

Interestingly, apart from saying that it would acquire a specific “interest” in these channels, TV18 has not disclosed the equity holding it would end up with. Neither TV18 nor RIL explained the difference between economic interest and equity stake.

“The funding is being provided by the trust as an accretive investment for RIL shareholders,” Bahl said in a conference call with analysts on Tuesday.
Bahl has refused to give finer details of the deal including the details of the total shareholding of RIL in ETV.
He also refused to divulge the financials of these channels and the incremental addition to TV18’s balance sheet subsequent to the completion of the deal.
“We will be able to provide the details only on consummation of the deal. There are several steps that are still to be crossed before concluding the deal. The completion of the rights issue is a condition precedent to the entire acquisition. There are various clearances that are yet to be sought including one from the Competition Commission of India (CCI). But, we are sure that we will be able to squeeze these assets (ETV channels) and focus on profitability in the next 12 to 24 months,” Bahl explained.
Apart from divesting its interest and funding the deal, RIL has also entered into a content distribution agreement with TV18 and Network 18.
As per the agreement, Infotel Broadband, a subsidiary of RIL, would have preferential access to all their content for distribution through the 4G broadband network being set up by it. Infotel would have preferential access to the content of all the media and web properties of Network 18 and its associates and programming and digital content of all the broadcasting channels of TV18 and its associates on a first right basis as a most preferred customer.
“Following the completion of this deal, TV18 will have minimal debt, which along with higher subscription revenues is a huge positive over the long term,” said Abneesh Roy, analyst with Edelweiss Securities, in a note after the deal announcement.
“Post the deal, the TV18 bouquet will include more than 25 channels which will boost subscription revenues in both domestic and international markets and impart it higher bargaining power with advertisers … Key risks/concerns are huge dilution, competition in Kannada and Telugu markets with Sun TV (who is TV18’s distribution partner) and potential merger blues,” Roy said.