Dilution after rights issue and various other ambiguities likely to dog stock value.
Despite strong operational synergies from the ETV deal, huge dilution and uncertainties in the deal structure are key concerns for TV18.
TV18 Broadcast and Network18 Media stocks have spurted 30 per cent and 37 per cent, respectively, since the announcement of fund raising through rights issues and the ETV deal. The issues and the ETV acquisition are expected to help reduce debt, enhance cash flow and create a stronger portfolio of channels.
| COSTLY GAINS | |||
| Rs crore | FY11 | FY12E | FY13E |
| Revenues | 1,110 | 1,181 | 1,380 |
| % change y-o-y | 83.9 | 6.4 | 16.8 |
| Ebitda | 134 | 106 | 138 |
| Net profit | 23.0 | 54.7 | 91.2 |
| EPS (Rs) | 0.6 | 1.5 | 2.5 |
| % change y-o-y |
NM | ||
However, analysts say in the short to medium term, the opaque nature of the deal, huge dilution after the rights issue and pressure on advertisement revenues would be a drag on the stock. Non-availability of ETV's financials and uncertainty on when TV18 is to buy the residual stake in various ETV channels are some of the deal ambiguities, which may act as an overhang.
Further, analysts believe the Rs 2,100-crore deal for ETV assets has come at a high cost. Ritwik Rai of Kotak Securities says TV18 may have paid an estimated value (EV) to sales multiple of five times for ETV assets. Whereas, stronger companies such as Sun TV trade at 4.75 times EV/sales for FY12. TV18 itself trades at just 1.5 times EV/sales. The tradeoff involved in the high cost of ETV assets and the equity dilution is significant, he feels.
Gains at a cost
Both Network18 and TV18 are to raise Rs 2,700 crore each via rights issues to retire existing debt, fund the acquisition of ETV Channels and manage working capital needs. Network18 will subscribe to Rs 1,400 crore in the TV18 rights issue and the net funds raised by both companies will be close to Rs 4,000 crore. Network18 and TV18 had combined debt of Rs 2,780 crore on their books as on September 30. Repayment will vary to the extent of subscription to the rights issues. In the event of full repayment of debt, the group will save close to Rs 350 crore towards interest costs paid annually, improving profitability of these companies.
While debt reduction and operational synergies (revenue and market share gains) are a positive, the gains will be offset by huge dilution in both the companies, post the issue. TV18 would likely see a dilution of over 187 per cent post the rights issues, says a Kotak Securities report. Thus, for FY12 and FY13, earnings per share are likely to be under pressure.
However, if it fails to generate adequate response, the promoters can step in to fill the unsubscribed portion. Minority shareholders own close to 40.3 per cent stake in TV18. In the event of non-subscription, this could fall as low to 11-12 per cent. In this scenario, the company will have to go for delisting.
Further, RIL, through its Independent Media Trust, will invest in optionally convertible debentures (OCDs) of the two companies to fund promoters' subscription to the issues. Given the unavailability of terms of the OCDs, there is uncertainty regardingownership of the companies at the time of conversion of these debentures. However, the tie-up with Reliance Industries’ subsidiary, Infotel Broadband, is expected to enhance the TV18 group’s distribution reach.
Operational gains
The buyout of ETV's 12 channels is a positive step for TV18, as it will enable the company to offer a strong basket of regional channels. This will put it into the league of bigger players such as Zee Networks, STAR TV and Sony. TV18 Broadcast will be offering a little over 25 channels after this deal, which would not only strengthen its subscription revenues, but also increase bargaining power with advertisers.
Notably, ETV enjoys a strong position in the Marathi, Telugu, Odiya and Gujarati general entertainment channel (GEC) segments. It has lesser market share in other segments. From a valuation, as well as from the market share perspective, analysts find a Rs 2,100-crore deal price expensive. Analysts at Antique Stock Broking write in a recent report, "The acquisition appears expensive, considering the attributable market size, financials and synergy of acquired channels."
Further, while TV18 will enjoy management control in ETV news channels and non-Telugu GEC channels, it will be a minority shareholder in the Telugu channels of ETV. The company also has the option to buy the remaining stake of RIL in these channels. On the other hand, high competition from Sun TV (distribution partner of TV18) in the Telugu and Kannada markets, coupled with the opaque nature of the ownership pattern after the deal, are key concerns for the company.
