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The New Media Barons

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Mukesh Ambani's complicated investment in Raghav Bahl's Network18 Group to fund the creation of a media conglomerate with the Eenadu TV (ETV) has set alarm bells ringing. And the nervousness among media-owning companies is palpable. "This is going to create a run among corporate groups wanting a chunk of influence. Those like Adanis or Essars are going to replicate this. It is particularly negative for news media as news is best left to those who have experience in handling it," laments the CEO of a leading television and media group.

Evidently, the Network18 "takeover" has created both excitement and unease in the barren and fund-starved industry. Spokespersons of Reliance Industries (RIL) have been repeating that they have no intention of "controlling" media and that the investment is part of the group's plan to develop sources of media content for its ambitious 4G rollout. But many in the media industry remain worried nonetheless.

In a quieter move, a year ago, Mukesh's brother Anil Ambani took over ailing business channel Bloomberg UTV. His Anil Dhirubhai Ambani Group (now Reliance Group) has had a strong presence in media and entertainment ever since it took over Adlabs in 2005. But the Bloomberg UTV move was its first in news.

The Ambanis may deny it, but we now have two new media and entertainment barons on the firmament. How large are their empires and where is it all heading is still a mystery. But the bits and pieces that can be unraveled make an important script for the media industry.



The Reliance Empire
Anil has never hidden his fascination for the media and entertainment business. He has put his money where his mouth is. Two weeks after the brothers split in mid-2005, he hit the headlines by buying a 66 per cent stake in the highly profitable Adlabs for Rs 337 crore. In one fell swoop, he bought India's largest film processing facility along with a large exhibition chain of 51 multiplex screens all over the country. Ambani quickly scaled up infusing another Rs 677 crore. The rebranded Adlab — Reliance MediaWorks — now owns 530 screens worldwide under the BIG Cinemas brand.

The group followed up with the launch of direct-to-home (DTH) services under Reliance BIG TV in August 2008 and later broadcasting. Tarun Katial, the young CEO who came from Sony Television, first set up the company's radio business with the largest network of 45 stations. FM radio was initially parked with Reliance MediaWorks, but was later spun off into Reliance Broadcast Network. In October 2010, Katial entered broadcasting, launching three low-risk English entertainment channels in alliance with US major CBS and followed up with two regional channels: BIG Magic for the Hindi heartland and Spark Punjabi for the large desi and foreign Punjabi-speaking markets.

That said, film production and distribution is the largest slice of Reliance's entertainment empire. After the Adlabs acquisition, Anil in September 2008 signed a deal with DreamWorks' promoters Steven Spielberg and David Geffen. He invested $550 million in DreamWorks to facilitate its exit from Paramount Studios and parent Viacom and set up an independent $1.3-billion studio. The rest, $750 million, was to be raised as debt from JPMorgan Chase. DreamWorks has since released a clutch of movies including Dinner for Schmucks, Fright Night, Cowboys & Aliens and I Am Number Four. Two of the most recent releases The Help (US box office collections $170 million) and War Horse are among the 10 nominees at this year's Oscars for Best Picture.



In India, Reliance Entertainment has emer-ged the largest producer-distributor of movies. Using the acquisition model where movies are picked up off the shelf or at the concept stage, it has been among the biggest hits and flops in Bollywood in the past two years — from 3 Idiots, which grossed a record Rs 315 crore in box office collections to two huge flops Kites and Raavan. The two reportedly burnt a hole of over Rs 100 crore. But then, the company bounced back in 2011, with the Ajay Devgn hit Singham in August, followed by Don 2 in December.

In News Media
He has always had a penchant for the entertainment business; but Anil's entry into news business raised many eyebrows when he bought an 84 per cent stake in Bloomberg UTV, held by Ronnie Screwvala. The channel had never really taken off. Former CEO Arun Anant estimated its annual losses at Rs 45 crore since it was launched in May 2008.

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After a year of operations under Reliance, Bloomberg UTV's audience share among English business channels has fallen further, to less than 4 per cent in January this year from 13.7 per cent a year ago, according to TAM Media Research. "If Reliance had not bought it and kept it afloat, the channel would have shut down," concedes its former editorial head Govindraj Ethiraj. But that begs the question: why did Reliance buy a lemon at the bottom of the heap? Many questions remain unanswered. Reliance did not participate in this story despite several requests from BW.

The Bloomberg UTV deal pales into insignificance when compared with RIL's investment in Network18. The funding, through RIL's affiliate Independent Media Trust, is structured to bail out Bahl and to bring ETV and Network18 under a single conglomerate. The plan is RIL will sell its entire stake in a clutch of ETV channels for about Rs 2,100 crore to Network18.



To finance this acquisition and to retire his back-breaking debt of about Rs 1,500 crore, Bahl will do a rights issue of Rs 2,700 crore each for his two group companies — TV18 and Network18 Media. This will be used to retire Network18's debt (Rs 1,500 crore) and fund the purchase of ETV channels (Rs 2,100 crore). The rest will be for expansion and development of the company. Bahl's share in the rights issue (Rs 1,700 crore) will be bank-rolled by Independent Media Trust.

Somewhere along the line, Reliance Group is also supposed to have made a bid for Network18, and it is believed to have taken 15-18 per cent stake through the fund D.E. Shaw. But the group exited later. It is no secret that after Reliance Group and RIL in May 2010 scrapped all non-compete agreements signed at the time of the split, Mukesh has been looking for business opportunities in emerging segments such as telecom and media, earlier reserved for the younger Ambani. Within weeks of the end of the non-compete pacts, RIL acquired Himachal Futuristic's Infotel Broadband Services, which is the only service provider to have bagged licences to set up 4G telecom services in all 22 zones in the country.

An RIL statement acknowledged the company had invested Rs 2,600 crore for acquiring 100 per cent in 10 ETV regional channels and 49 per cent in ETV Telugu and ETV Telugu News channels. The terms of the ETV deal clinched through Nimesh Kampani's JM Financial had been kept under wraps for quite a while. For long, RIL associates have also been rumoured to be financially aiding other struggling channels. Besides, the company has acknowledged that it has been talking to a few big cable TV networks to pick up stakes on these platforms.

The First Round
It is well-documented that the Ambanis have had a shot at news media in the past, too. In 1990, group founder Dhirubhai Ambani, targeted by a section of the media including The Indian Express, had sought out a countervailing strategy by first buying the small but strident Sunday Observer, edited by Vinod Mehta, from Jaico Publishers in 1990 and then launched a daily, Business And Political Observer. For underpaid journalists, it was a windfall; but seniors who worked for the daily said the management was a divided house and its news content never seriously challenged the leader, The Economic Times. After limping along for almost a decade, the daily shut down in May 2000.

The Ambanis were temporarily out of news platforms, but they always kept their sights on media and entertainment. By 2000, Reliance Entertainment was spawned and former film producer and Plus Channel promoter Amit Khanna was appointed CEO. The company did not generate business initially, but worked as a crucible for pursuing plans for the group's entry into DTH, movie investments and broadcasting. Reliance Entertainment was passed on to Anil after the brothers split in mid-2005.

Some see the news media initiatives as a realisation by the Ambanis that — following the family split and the relative erosion of political influence — there is a need to bolster their presence. Pritish Nandy, who worked for the Ambanis' short-lived publishing business before turning entrepreneur, says: "In India, it is not possible to exercise influence without control of news media. They have realised that." On the other hand, the RIL camp is keen to dispel the impression that the group is re-entering news media.

A spokesperson of the group reiterated to BW that RIL or Mukesh had no intention of getting into media. "We want to be a facilitator between content providers and consumers by creating a bank of content. We now have the rights for 4G, which is the next big thing in telecom since 3G has failed. We do not want to control media. Nor do we want to run channels."

Nevertheless, RIL concedes the group is not averse to investing in media firms and it has a few cable companies in its sights. "If entry enhances the value of these companies, we could get in. We could pick up stakes in cable companies, too. If, for instance, a cable company comes to us and tells us it has five million subscribers and it wants to ramp up, we may say, ‘yes, take Rs 50 crore', and we may help it with the technology, too." The spokesperson, however, added for good measure: "But that does not mean we want to get into the media business as we do not understand the media business."

Mixed Bag
The Reliance Group of Anil Ambani has managed to scale up quickly through both acquisitions and launches. The group's Indian operations' annual revenues are more than Rs 2,000 crore and it is probably the fourth-largest media operation after The Times Group, Zee and Star India. There is, however, a question mark over its performance, and whether it will be able to sustain the tempo.

Reliance MediaWorks scaled up through acquisitions of multiplex screens, but these came at a huge price, especially those that were acquired in the US and Malaysia. Adlabs' founder-promoter Manmohan Shetty once told BW: "It was I who suggested the selective acquisition of screens in the US to help our Hindi film distribution network. But what we now have is a chain of theatres showing Hollywood movies, which is not our core competence." Reliance MediaWorks CEO Anil Arjun defends his strategy: "Our presence in 50-60 cities has added depth to our distribution. By retrofitting old cinemas, we can offer as many as nine shows a day."

Six years after the Adlabs takeover, the company posted a net loss of Rs 330 crore on sales of Rs 836 crore in 2010-11. The first half of 2011-12 was worse. Reliance MediaWorks notched up Rs 237 crore in losses on sales of Rs 428 crore. Before its takeover, Adlabs was a small, tight operation with a turnover of about Rs 100 crore and a net profit of Rs 20-25 crore.

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Reliance Broadcast is a leaner operation with the FM radio business making marginal profits. But the launch of new channels has dragged down the bottom line. Even then the first nine months of FY 2011-12 results show just a marginal loss of Rs 4 crore on a turnover of Rs 200 crore. It has also shelved plans to launch 45 TV channels. Reliance Broadcast's Katial stresses the company will adopt a low cash burn strategy by sharing costs with partners and avoiding expensive genres such as Hindi general entertainment for now.

It is, however, the performance of the movie business — where larger amounts are locked in and the risks are greater — that will determine the Reliance report card. DreamWorks has two Oscar nominations to show, but the first round of financing raised in 2008 is almost dry and prospects of future infusions look bleak. The movie audit shows The Help, War Horse and Real Steel are making money, but the others have either lost money or struggled. The bigger challenge for the Spielberg-Ambani alliance is that raising the projected $1.3 billion never happened. Reliance Group's initial equity of $325 million was matched by $325 million by JPMorgan Chase in debt, but with Ambani failing to put in the rest of the initially agreed $550 million, the remainder of the projected $750 million in debt has also not come in. Hollywood analysts are raising the question whether DreamWorks can be sustained in the context of Spielberg's grandiose concepts and Oscar-level-movie-making that cost $100 million or more per project, but without the deep pockets of the other Hollywood studios. As Oscar night nears on 26 February, there will be serious meetings on the sidelines between DreamWorks officials and the Reliance team on how to raise the second round of financing.

Back in Mumbai, even as Reliance Entertainment CEO Sanjeev Lamba and group vice-chairman Amitabh Jhunjhunwala celebrate the success of Don 2, analysts ask whether its pure acquisition model in Bollywood will sustain. "The acquisition model is weighed heavily in favour of the original producer. Armed with a good product and with many suitors in queue, he drives a hard bargain," says a senior executive from a production-distribution house. "Even if the movie does well, as the acquisition price is high (Rs 100 crore or more for big ones), the distributor may be left with Rs 5 crore or less."

Telecom Or Media?
For RIL, how will its investments in Network18-ETV pan out? The Independent Media Trust will not initially hold equity in the new media group. Instead, the investment will be held as optional convertible debentures (OCDs). When and how these will be turned into equity is not known. For now, RIL says management control will continue to vest with Bahl and his team. "I do not know (about) the arrangement. I do not know how OCDs work," the RIL spokesperson told BW. What we do know is that in one swoop, Kampani and Mukesh have created a news and media giant with 26 channels and with revenues of Rs 1,700 crore, which will be be snapping at the heels of competitors very soon.

Some analysts say such deals reflect Mukesh's passion for taking telecom technology to a new level with sophisticated and original content. "Content deals have to be backed up by equity deals such as the Network18 one to keep the flow. It is like the Times Group's private equity deal that guarantees advertising flow," says Smita Jha, entertainment and media practice leader at PricewaterhouseCoopers. Says Jehil Thakkar, head of media and entertainment at KPMG: "Mukesh has a yen for technology. He is the architect for RIL's 4G plan and you can count on him coming out with some disruptive models. In 4G, revenues from data will be the main source and video is the largest use of data."

Other analysts see the Network18 deal as a mathematical miracle. "Mukesh is looking to enter Network18 with Rs 1,700 crore, and partially exiting ETV with Rs 2,100 crore — clearly cash flow positive. The rest of the ETV acquisition and debt repayment would be paid for by investors and public shareholders," says Victor Fernandes, former CEO and founder of Moneycontrol.com, now a Network18 entity.

But is not this the famed Ambani way of doing business — buying two for the price of one? In the age of convergence, we cannot create a Chinese wall between telecom and media. If growing telecom means buying a few media firms and extending one's influence and reach, so be it. A calculated guess is we are going to see more acquisitions of the Network18 and ETV variety.

gurbir(dot)singh(at)abp(dot)in

(This story was published in Businessworld Issue Dated 20-02-2012)