Convergence implicit in consolidation

CONVERGENCE AND CONSOLIDATION - PART II. The three latest corporate investors in the media industry signal the entry of non-media players, two of them with telecom interests.
PARANJOY GUHA THAKURTA examines the trend

Consolidation of media activities is formalized through conglomerates and increased corporate institutionalism. A look at the business activities of some of the leading media organisations in the world confirm the proposition that economies of scale lead to the formation of oligarchic markets. In India, however, the formation of new media conglomerates in recent times is also a consequence of existing debt-burdened players seeking associates to bail them out while seeking synergies for distribution of content in a converged environment.

It has been observed over the last few years that there has been growing consolidation of media organisations across the globe. In the United States, both CBS and ABC have been swallowed up by media conglomerates, as have Time Warner and CNN. Rupert Murdoch’s NewsCorp group, which has interests worldwide, is consolidating as is Germany-based Bertelsmann AG which has associations and operations in over 60 countries.  

Now if we consider the entry of Reliance Industries Limited (RIL), India’s largest corporate entity in the private sector, into the country’s media industry in a major way with strategic associations with the Network 18 group and the Eenadu group, both of which had been strapped for cash and steeped in debt in the recent past, we observe that the so-called “merger”--officially, “strategic association”--is no more guided by the logic of large-scale economies of scale and scope but by that of a “bailing out” mechanism. It is not difficult to assess that such activities may be interpreted as “takeovers” which have the potential to influence the “acquired” organisation. A closer look at this deal makes the issue of profit orientation evident and also raises questions about whether such conglomeration promotes or hinders greater media diversity and freedom. 

On January 3, 2012, the Mukesh Ambani-led RIL formally announced that it was entering into a complex, multi-layered financial arrangement that involved selling its interests in the Hyderabad-based Eenadu group founded by Ramoji Rao to the Network 18 group headed by Raghav Bahl and also funding the last-named group through a rights issue of shares. The association, Bahl himself has said, makes the new conglomerate India’s biggest media group, bigger than the Rupert Murdoch-controlled STAR group and the Jain family-controlled Bennett, Coleman Company Limited (BCCL) group (publishers of The Times of India--said to be the world’s largest-circulated English-language daily newspaper and the Economic Times, among other newspapers, and owners of the Times NOW and Zoom television channels). This stands as an example of vertical convergence as well as lateral expansion leading to consolidation that could reduce competition and lead to the emergence of a market hegemony.  

The Network 18 group of television channels includes news channels such as CNBC-TV18, CNBC Awaaz, CNN-IBN, IBN7, and IBN Lokmat apart from non-news channels such as Colors, MTV, VH1, and Nick (in a joint venture between TV 18 and the US-based Viacom). Television 18--a company in the Network 18 group--has stated that its board of directors had approved an outlay of up to Rs. 2,100 crore for the proposed acquisition of Eenadu TV’s assets. RIL, through an entity named--some would say, rather ironically--the Independent Media Trust will fund the acquisition of shares in Network 18 and TV18 through rights issues. The two entities are supposed to raise roughly Rs. 4,000 crore, including Rs. 1,700 crore from its promoters.

 RIL said its group companies, by investing Rs. 2,600 crore, will hold the following stakes in various Eenadu TV (ETV) channels: 100 per cent in regional news channels operating in Uttar Pradesh, Madhya Pradesh, and Bihar, in ETV Urdu, in entertainment channels in the Marathi, Kannada, Bengali, Gujarati, and Odiya languages, and 49 per cent in two Telugu channels, ETV Telugu and ETV Telugu News. RIL stated that it would be selling a part of the interest owned by it in the ETV channels to TV18 Broadcast Limited while TV18 said that it would acquire 100 per cent stake in ETV’s regional news channels, 50 per cent in non-Telugu entertainment channels, and 24.5 per cent interest in two Telugu channels.

 But what is arguably the most significant aspect of this strategic association that has been structured in a complicated manner is disarmingly simple: RIL, which is currently setting up an all-India broadband telecommunications network, will get preferential access to the content as well as the distribution assets of the two media groups. RIL’s broadband subsidiary, Infotel Broadband Services, has a memorandum of understanding with TV18 and Network18 Media and Investments for preferential access--on a first-come-first-served basis as a most preferred customer--to all content (including programming and digital content on television, internet, and print) produced by the Network 18 group and its associates for distribution through the broadband network being set up by Infotel.

 What are the implications of content access? Will it deprive the reading, listening and viewing public from exercising greater choices in accessing content, in the forms of both factual information as well as opinions? Will such an association also influence the nature and character of the content itself that is made available to audiences?

This is what RIL has stated: “Infotel is setting up a pan-India world class fourth generation broadband network using state-of-the-art technologies. Infotel expects to take leadership position in content distribution through broadband technology through a host of devices.”

 

Win-win partnership

 

RIL said its subsidiary would access digital content on “entertainment, news, sports, music, weather, education, and other genres” and added that that this was “one of many” partnerships being undertaken by Infotel. “Reliance will leverage its deep understanding of Indian markets--consumer insights, technological expertise, and the ability to build and manage--to make this a win-win partnership. This will create value and be accretive to the shareholders of RIL,” the company stated.  

In an email to Network18 employees, Bahl said: “Our balance sheets will become among the strongest in the industry”. He added that group companies will now become debt free. Obviously delighted by what he described as a “transformational” development, he used a cricketing analogy to compare it to the “fourth innings” of a Test match. The first innings was the start-up phase, the next was when TV 18 undertook an initial offering of its shares, the third innings was when the group diversified across general news, entertainment, internet, print, filmed entertainment, and e-commerce. The fourth innings, he exulted: “…is now, when we have become the largest Indian media company, with a cache of capital and hungry ambition, ready to pile up runs and score a handsome victory on the 5th day of a Test match (keen cricket lovers will tell you how the most memorable Test match victories are recorded by those teams which have the gumption to chase runs in the fourth innings).”

 

Network 18 has had negative cash flow over the last two fiscal years. Clearly, this deal will help improve the group’s financial position dramatically. The Economic Times (January 4, 2012) wrote that the Network 18 and Eenadu groups will “come together creating a portfolio of 25 channels which will deliver a plethora of programmes to audiences ranging from village folk in Rajasthan to business executives in a Mumbai penthouse”. It added that the “Network18 group, saddled with debt and punished by the market for a string of poor performances, will be able to repay their debt and become a bigger enterprise with the merger of Eenadu”.

 

Outlook weekly (January 16) pointed out that RIL had acknowledged in the high court of Andhra Pradesh its investments in Ushodaya Enterprises, the holding company of the Eenadu/ETV group promoted by Ramoji Rao who is often credited with playing an important role in the rise of the late N.T. Rama Rao as the Chief Minister of Andhra Pradesh and thereafter, his son-in-law N. Chandrababu Naidu, former Andhra Pradesh Chief Minister and head of the Telugu Desam Party.

 

A petition had been filed in the court by the late Congress Chief Minister Y.S. Rajasekhara Reddy’s widow, Y.S. Vijayalakshmi, a member of the Andhra Pradesh Legislative Assembly, alleging that RIL had bailed out Ramoji Rao when his family-owned chit fund, Margadarsi, was in trouble and facing various inquiries (including those by the Reserve Bank of India). This, it was further alleged, was a quid pro quo for Chandrababu Naidu’s “assistance” in enabling RIL to sign a production sharing contract with the Union Ministry of Petroleum & Natural Gas to extract natural gas from the Krishna-Godavari basin off the coast of Andhra Pradesh.

 

The Outlook article by Arti Sharma in Mumbai with Madhavi Tata in Hyderabad suggested: “RIL bailed out ETV after a deal between Ushodaya and private equity investor Blackstone was scuppered by the then Andhra CM YSR. Investment banker Nimesh Kampani of JM Financial then pumped in Rs. 2,600 crore (he was hounded by YSR for his efforts). In 2008, ETV was transferred to RIL.”

 RIL has denied these allegations in court. Nevertheless, financial analysts quoted by various publications (including Outlook, Mint, and the Economic Times) have raised various questions about the deal. They have wondered whether this deal entails RIL buying back parts of its own assets, thereby raising issues of corporate governance. Why were RIL’s investments in the Eenadu group to the tune of Rs. 2,600 crore, made through J.M. Financial, not disclosed to its own shareholders until recently? Why has TV18 valued its stake in ETV at Rs. 2,100 crore with revenues of Rs. 525 crore? Will RIL eventually become a co-promoter of corporate entities in the Network 18 group?  

Outlook quoted Arun Kejriwal, director of financial research firm KRIS, asking: “Why would you want to acquire a company just to get access to content? These media companies are in the business of providing content. It’s very clear this is a foot in the door.” 

The other major strategic association in the media in India took place on May 19  when the Aditya Birla group announced that it had acquired a 27.5 per cent stake in Living Media India Limited, a company headed by Aroon Purie, which it acquired after reportedly competing with the likes of the Mahindra & Mahindra group (which is already in the entertainment business) and the RPG (Rama Prasad Goenka) group which publishes Open weekly.

Kumar Mangalam Birla, head of the Aditya Birla group, has gone on record saying that he would be a “financial investor” in the Living Media group by using his personal money. This has been estimated at an amount between Rs. 600 crore and Rs. 700 crore, thereby implying a valuation for the media group varying between Rs. 2,400 crore and Rs. 2,800 crore. Given that Living Media acts as a holding company and also owns 57.46 per cent in TV Today Network, a listed company, the value of Birla’s investments will be determined in the market. Whether or not this leads to an open offer to purchase shares from the public remains to be seen.

The Living Media/India Today group includes television channels (such as Aaj Tak--one of the leading, if not the leading, Hindi television news channels--and Headlines Today), a radio station (Oye FM) and publications such as India Today weekly and Business Today, besides licensed periodicals such as Cosmopolitan, Good Housekeeping, Men’s Health, Harper’s Bazaar, Travel Plus, and Harvard Business Review. Living Media also has a joint venture with German media house, Axel Springer AG, for an automobiles magazine and an online shopping portal, besides joint ventures with the UK-based Daily Mail for the daily Mail Today and with book publisher Harper Collins, which is part of the Murdoch media empire. Thomson Press, a printing firm controlled by the Purie family, is a separate corporate entity.

Sunrise sector

In 2003, Birla made an entry into the entertainment industry by setting up a cinema and television production firm called Applause Entertainment, which produced a critically-acclaimed film called “Black” starring Amitabh Bachchan. The company was, however, shut down six years later. Though many would disagree with his opinion, Birla stated: “The media sector is a sunrise sector from an investment point of view. I believe that Living Media India offers one of the best opportunities for growth and value creation.”

Aroon Purie, chairman of the India Today group, stated: “I am delighted to partner with the Aditya Birla group to aggressively address the current and future potential of the Indian media business which is at a tipping point. The Aditya Birla group with its strong leadership, global footprint, diversified business interests, and its shared values of integrity, commitment, and social responsibility is a perfect fit with the India Today group.”

As on March 31 2012, Living Media owned around 57.46 per cent in TV Today while the Anil Ambani-promoted Reliance Capital owns 13.62 per cent, the Life Insurance Corporation 3.61 per cent, Tata Mutual 1.05 per cent, and stock-broker Ramesh Damani 1.36 per cent.

Amidst all the media coverage of the Birla-Living Media deal, one crucial aspect appears to have been almost completely ignored. Birla also happens to head Idea, one of India’s three largest private mobile telecom companies. Clearly, the promoters of the companies involved perceive synergies on account of the growth in mobile communications--not just in the vanilla voice segment but in data transfer and in video/television--in the foreseeable future with the increased deployment and use of third generation (3G), fourth generation (4G), and long-term evolution (LTE) technologies in the country.

On December 21 2011, Oswal Green Tech, formerly Oswal Chemicals & Fertilizers, acquired a 14.17 per cent shareholding in New Delhi Television in two separate block deals from the investment arms of Merill Lynch and Nomura Capital. Over 91.3 lakh equity shares of NDTV, which runs news and entertainment channels under the same brand, changed hands. While Merrill Lynch Capital Markets Espana sold its holding of over 51 lakh shares at Rs. 26.55 a share, Nomura Mauritius sold over 40 lakh shares each at Rs. 26.75, according to information made available to the Bombay Stock Exchange. The total deal was worth Rs. 24.34 crore.

 NDTV is a broadcaster with news channels such as NDTV 24x7 (English), NDTV India (Hindi), and NDTV Profit (business). In 2007 the company launched NDTV Good Times, a lifestyle channel. Oswal had started out as importers of synthetic and wool wastes and thereafter went into the manufacture of fertilizers and agro-products such as vegetable oil and flour. In 2005, Kribhco (a fertiliser manufacturing and distribution body called Krishak Bharati Cooperative) picked up Oswal’s urea unit for Rs. 1,900 crore. The company has been promoted by Abhey Kumar Oswal whose daughter, incidentally, is married to industrialist and Congress Member of Parliament  Naveen Jindal.

 It may be recalled that in April 2011, Goldman Sachs Investments Mauritius and GS Mace Holdings exited from NDTV by selling their entire stakes in a deal worth Rs. 70 crore which was then picked by Merrill Lynch Capital Markets Espana and Nomura Mauritius Ltd. Then, in October, NDTV along with Kasturi & Sons had decided to sell their combined stake in Metronation Chennai Television Ltd to Educational Trustee Company Pvt. Ltd., promoters of the Tamil daily Dina Thanthi for Rs. 15 crore. Metronation Chennai Television Ltd was a joint venture between NDTV and The Hindu, operating under the brand name NDTV Hindu. At the end of September 2011, NDTV’s promoters, Prannoy Roy, Radhika Roy, and RRPR Holding were holding 61.45 per cent stake in the company, foreign institutional investors 18.08 per cent and retail investors 14.7 per cent.

 

The three examples given indicate how corporate groups that were earlier not associated (or hardly associated) with the media, namely, the groups led by Mukesh Ambani, Kumar Mangalam Birla, and Abhey Oswal, have become important players and participants in India’s media industry.   

 

(The author is an independent journalist and educator. Research Assistant: Ahana Banerjee)

 

 

 

 

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