JitendraKumar
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MUMBAI: In the midst of a wave of consolidation, the television landscape is changing dramatically in India. The bigger broadcast networks have already spread their power across genres and geographical markets, squeezing out further space for smaller TV companies. On the distribution front, the national multi-system operators (MSOs) have used the government’s digitisation mandate to grow inorganically through smaller buyout deals.
Direct-to-home (DTH) is the only sector to have stood outside this shadow, though conversations had started between Sun Direct and Reliance Digital TV a few years back. Now that is also set to change.
Dish TV promoter and managing director Jawahar Goel has started the deal machine in the DTH sector. A father-figure in the TV distribution business, he has inked a deal with the Dhoots to merge their DTH company Videocon d2h with Dish TV. He will be the commander-in-chief of this new enlarged company, working out synergies, bargaining with broadcasters over content deals, and guiding the Indian pay TV market to its next stage of evolution.
Size does matter
Size is the most attractive part of the deal. The new monster, to be named Dish TV Videocon, will become a leading listed media company by sales. The combined revenue of Rs 59.2 billion in FY16 is higher than Zee Entertainment Enterprise Ltd’s (ZEEL) turnover of Rs 58.5 billion.
Combined EBITDA is Rs 1,826.2 crore, as of 31 March 2016. EBITDA margin is 31%.
Dish TV Videocon will, in fact, become the second-largest DTH company in the world by subscribers, behind only DirecTV (37.8 million).
As of 30 September 2016, its combined net subscriber base stands at 27.6 million.
Subscriber market share in the DTH sector will be 45%, almost double the size of Tata Sky. The other private DTH operators are Airtel Digital TV, Sun Direct and Reliance Digital TV. Pubcaster Prasar Bharati runs a subscription-free DTH service called Freedish.
Of the total 175 million TV households in India, the merged entity will command 16%. There will be significant room for growth, driven by increased digital penetration.
Dish TV expects the deal to close in the second half of 2017. The proposed transaction needs to pass the regulatory muster, including SEBI, the stock exchanges, shareholders and the creditors of both companies. It will also have to sail through the Competition Commission of India (CCI).
Content cost advantage and revenue upside
So, will Dish TV Videocon be able to flex its muscle to extract sweeter content deals from broadcasters?
The Dish TV–Videocon d2h combine will have a natural advantage. The sheer size of the subscriber base will empower the merged company to bargain with broadcasters better and bring down content cost. In FY16, the combined content cost of Dish TV and Videocon d2h stood at around Rs 1,800 crore (Rs 18 billion).
Being a late entrant, Videocon d2h’s content cost has been historically higher than Dish TV. Since Dish TV’s content cost is around 28% of its revenue compared to Videocon d2h’s 37%, analysts feel there is room for a cost saving of at least 10%.
The smaller broadcast networks will have more to worry. They can’t ignore a distribution platform that commands nearly 28 million subscribers and is growing.
However, in the proposed tariff order by the Telecom Regulatory Authority of India (TRAI), many of these worries may turn irrelevant as deals have to be based on parity and transparency.
“In the new tariff regime proposed by TRAI, such merger and acquisition deals will have limited impact on broadcast networks. There will, however, be synergistic advantages due to economies of scale that the merged entity will enjoy,” says IndiaCast Group CEO Anuj Gandhi.
Dish TV Videocon will also be at an advantage when it comes to charging placement and marketing fees. The enlarged company can make big bargains in such deals, particularly from the weaker channels. New channels will also have to look at the combined entity as a formidable distribution platform.
Dish TV Videocon will be looking to double its annual revenue from placement and marketing to around Rs 300 crore, a year after operations.
There will be other areas where the merged entity can see revenue upside. Deriving knowledge of consumer behaviour of the two entities, new products can be developed accordingly, particularly in the area of value-added services (VAS).
The merged entity will aim to grow alternative revenue streams like carriage, advertising, VAS and new channel launches. These are margin accretive and are expected to strengthen the company’s EBITDA.
Dish TV Videocon will also be in a better position to take price hikes in various subscription packs, though this will largely depend on the pay TV ecosystem. One step towards increasing average revenue per user (ARPU) could be to do away with the Rs 99 pack.
Strategic value
With Dish TV and Videocon d2h having slightly different business profiles, the merged entity will have a better mix of rural and urban subscribers. According to market estimates, Dish TV has a mix of 70% rural subscribers and 30% urban subscribers (top 200 towns). In the case of Videocon d2h, rural subscribers comprise 60% while urban accounts for the rest 40%.
Videocon d2h also has a higher mix of high-definition (HD) subscribers. The merged entity will have over 2.8 million HD subscribers.
Geographically, Videocon d2h has a better spread in the South than Dish TV. Both, however, have footprints mainly in the Hindi-speaking markets (HSM).
The combined entity will have a strong distribution network. Dish TV and Videocon d2h have 2,268 and 2,800 distributors respectively. The dealer network for Dish TV is 0.24 million and for Videocon d2h 0.23 million. Dish TV has 1,090 service franchisees while Videocon d2h has 320 direct service centres.
Cost synergy
Cost saving due to economies of scale is the most visible benefit of the deal. The merged entity will be able to drive in cost savings in the form of infrastructure sharing, buying of set-top boxes (STBs), call centre outsourcing and commissions to dealers.
Manpower cost, which was around Rs 250 crore in FY16, could fall by 20% in two years from start of operations. Dish TV and Videocon d2h together have a workforce of 20,000, including field staff.
With the location of satellites for Dish TV and Videocon d2h just 5 degrees away, there is possibility of a saving of upwards of Rs 100 crore a year. This is technologically possible and could yield results in 3–5 years. Both entities pay Rs 317 crore (Rs 3.2 billion) annually as transponder lease cost.
Call centre operations could get integrated. The two companies cumulatively incur Rs 180 crore towards call centre services.
Valuation of deal
There is an almost 34% premium to the indicative market cap of Videocon d2h’s Nasdaq-listed ADRs, leading some analysts to say that the deal was expensive.
The share-swap ratio, however, seems justified looking at key parameters like revenue, EBITDA, subscriber-base and ARPU.
“When you look at it from parameters like revenue, EBITDA and subscriber base, the valuation seems to be fair. Videocon d2h’s EBITDA and revenue is close to Dish TV’s and ARPU is more,” says a media analyst.
As per the deal, Dish TV shareholders will own 55.4% of the enlarged new company. The remaining 44.6% stake in the merged entity will be with the Videocon d2h investors.
The Dish TV promoter holding in the enlarged new company will be 36% while the Videocon d2h promoters will own 28%. The remaining 36% will be with the public.
Another reason weighing in favour of the valuation of the deal is the understanding that the promoters of Dish TV are going to buy a 9% stake from the principals of Videocon d2h to increase their holding in the merged company.
With the additional purchase after the amalgamation, the Dish TV promoter holding will rise to 45% in the merged company.
“It is a merger and not a cash deal. Besides, the promoters of Dish TV can buy additional shares in a supplementary transaction to up their stake,” says a media analyst at a broking firm.
Dish TV promoters have the right of first offer to buy in case Videocon d2h promoters decide to further sell their stakes in the merged company.
Combined net debt is Rs 2,161 crore. Net debt to operating profit is 1.2 times.
Will size spur consolidation in the cable TV and DTH sector?
Leaving a big mark on the DTH sector, the Dish TV–Videocon d2h merger may prompt competitors to look at marrying.
Any kind of deal, big or small, can take place. Various theories are floating around. Will Tata Sky and Airtel Digital TV merge or get engaged in a buyout deal? Will Reliance Digital TV and Sun Direct resume talks? Can Reliance Digital TV be part of Tata Sky or Airtel Digital TV?
However, there is no immediate compulsion to consummate just because a new giant DTH company will be active sometime next year. The merger of Dish TV and Videocon d2h is expected to conclude in the second half of 2017, a few months after the new deadline ends on the final phase of digital addressable system (DAS) on 31 March 2017. The scramble for DAS Phase IV subscribers would have ended by then unless the government once again extends the sunset date.
Some senior executives of DTH companies also feel that for acquiring new subscribers it will be an open field and neither Tata Sky nor Airtel Digital TV will be at a disadvantage. As for Kalanithi Maran-promoted Sun Direct, it is positioned as a DTH company for the southern region and its low-ARPU business model will give it a distinct footprint. Reliance Digital TV in any case is not making attempts to grow and has stayed put with a subscriber base of five million for the last three quarters in a row.
But the possibility of deal-making in the future cannot be ruled out. The benchmark of a DTH company’s size has been laid by Dish TV and Videocon d2h. Biggies like Tata Sky and Airtel Digital TV would want to scale up while Sun Direct could position itself as a mid-tier DTH company. The course of action for Reliance Digital TV is uncertain.
Pricing power also could come if there is further consolidation in the DTH sector, some media analysts say.
How will the cable TV sector be impacted? Will it force MSOs to further consolidate?
According to DEN Networks CEO SN Sharma, several cable TV networks have consolidated over the years. “DAS provided an impetus for further consolidation. Some MSOs have already built scale,” he says.
In fact, there are three big national MSOs versus six DTH players (after the merger, DTH will have five private players). Even regional MSOs like GTPL Hathway and Fastway Transmissions have aggressively expanded their footprint to markets outside their home turf.
Digicable managing director and CEO Jagjit Kohli hopes that the deal counter would get activated in the cable TV sector. “Consolidation is good for the industry and shows that the distribution side of the broadcast business is getting matured. Maybe the merger deal in the DTH sector will act as a catalysis for MSOs to swing into action. Cable may go the DTH way, and we could see big-ticket deals in the sector,” he says.
Incidentally, Digicable has been looking to dilute stake and was in talks with all the big national MSOs.
Former Hathway Cable & Datacom MD and CEO Jagdish Kumar, however, does not believe that the Dish TV–Videocon d2h deal will necessarily trigger consolidation in the cable TV sector. The national MSOs, according to him, are entrenched in the urban areas and do not see any incremental threat coming from DTH companies. In DAS Phase IV areas, DTH in any case is expected to have a better run, as for national MSOs the cost to reach TV households may not justify the revenue potential.
Kumar rules out mega deals in the cable TV sector unless valuations improve. “The valuations of cable companies are currently extremely depressed to favour any big-ticket deal. Consolidation will happen only when valuations become more stable,” he says.
MSOs will expect valuations of their companies to improve in 2017 so that they can raise further capital to expand their video and broadband business.
2016: Jawahar Goel kick-starts DTH deal machine | TelevisionPost.com
Direct-to-home (DTH) is the only sector to have stood outside this shadow, though conversations had started between Sun Direct and Reliance Digital TV a few years back. Now that is also set to change.
Dish TV promoter and managing director Jawahar Goel has started the deal machine in the DTH sector. A father-figure in the TV distribution business, he has inked a deal with the Dhoots to merge their DTH company Videocon d2h with Dish TV. He will be the commander-in-chief of this new enlarged company, working out synergies, bargaining with broadcasters over content deals, and guiding the Indian pay TV market to its next stage of evolution.
Size does matter
Size is the most attractive part of the deal. The new monster, to be named Dish TV Videocon, will become a leading listed media company by sales. The combined revenue of Rs 59.2 billion in FY16 is higher than Zee Entertainment Enterprise Ltd’s (ZEEL) turnover of Rs 58.5 billion.
Combined EBITDA is Rs 1,826.2 crore, as of 31 March 2016. EBITDA margin is 31%.
Dish TV Videocon will, in fact, become the second-largest DTH company in the world by subscribers, behind only DirecTV (37.8 million).
As of 30 September 2016, its combined net subscriber base stands at 27.6 million.
Subscriber market share in the DTH sector will be 45%, almost double the size of Tata Sky. The other private DTH operators are Airtel Digital TV, Sun Direct and Reliance Digital TV. Pubcaster Prasar Bharati runs a subscription-free DTH service called Freedish.
Of the total 175 million TV households in India, the merged entity will command 16%. There will be significant room for growth, driven by increased digital penetration.
Dish TV expects the deal to close in the second half of 2017. The proposed transaction needs to pass the regulatory muster, including SEBI, the stock exchanges, shareholders and the creditors of both companies. It will also have to sail through the Competition Commission of India (CCI).
Content cost advantage and revenue upside
So, will Dish TV Videocon be able to flex its muscle to extract sweeter content deals from broadcasters?
The Dish TV–Videocon d2h combine will have a natural advantage. The sheer size of the subscriber base will empower the merged company to bargain with broadcasters better and bring down content cost. In FY16, the combined content cost of Dish TV and Videocon d2h stood at around Rs 1,800 crore (Rs 18 billion).
Being a late entrant, Videocon d2h’s content cost has been historically higher than Dish TV. Since Dish TV’s content cost is around 28% of its revenue compared to Videocon d2h’s 37%, analysts feel there is room for a cost saving of at least 10%.
The smaller broadcast networks will have more to worry. They can’t ignore a distribution platform that commands nearly 28 million subscribers and is growing.
However, in the proposed tariff order by the Telecom Regulatory Authority of India (TRAI), many of these worries may turn irrelevant as deals have to be based on parity and transparency.
“In the new tariff regime proposed by TRAI, such merger and acquisition deals will have limited impact on broadcast networks. There will, however, be synergistic advantages due to economies of scale that the merged entity will enjoy,” says IndiaCast Group CEO Anuj Gandhi.
Dish TV Videocon will also be at an advantage when it comes to charging placement and marketing fees. The enlarged company can make big bargains in such deals, particularly from the weaker channels. New channels will also have to look at the combined entity as a formidable distribution platform.
Dish TV Videocon will be looking to double its annual revenue from placement and marketing to around Rs 300 crore, a year after operations.
There will be other areas where the merged entity can see revenue upside. Deriving knowledge of consumer behaviour of the two entities, new products can be developed accordingly, particularly in the area of value-added services (VAS).
The merged entity will aim to grow alternative revenue streams like carriage, advertising, VAS and new channel launches. These are margin accretive and are expected to strengthen the company’s EBITDA.
Dish TV Videocon will also be in a better position to take price hikes in various subscription packs, though this will largely depend on the pay TV ecosystem. One step towards increasing average revenue per user (ARPU) could be to do away with the Rs 99 pack.
Strategic value
With Dish TV and Videocon d2h having slightly different business profiles, the merged entity will have a better mix of rural and urban subscribers. According to market estimates, Dish TV has a mix of 70% rural subscribers and 30% urban subscribers (top 200 towns). In the case of Videocon d2h, rural subscribers comprise 60% while urban accounts for the rest 40%.
Videocon d2h also has a higher mix of high-definition (HD) subscribers. The merged entity will have over 2.8 million HD subscribers.
Geographically, Videocon d2h has a better spread in the South than Dish TV. Both, however, have footprints mainly in the Hindi-speaking markets (HSM).
The combined entity will have a strong distribution network. Dish TV and Videocon d2h have 2,268 and 2,800 distributors respectively. The dealer network for Dish TV is 0.24 million and for Videocon d2h 0.23 million. Dish TV has 1,090 service franchisees while Videocon d2h has 320 direct service centres.
Cost synergy
Cost saving due to economies of scale is the most visible benefit of the deal. The merged entity will be able to drive in cost savings in the form of infrastructure sharing, buying of set-top boxes (STBs), call centre outsourcing and commissions to dealers.
Manpower cost, which was around Rs 250 crore in FY16, could fall by 20% in two years from start of operations. Dish TV and Videocon d2h together have a workforce of 20,000, including field staff.
With the location of satellites for Dish TV and Videocon d2h just 5 degrees away, there is possibility of a saving of upwards of Rs 100 crore a year. This is technologically possible and could yield results in 3–5 years. Both entities pay Rs 317 crore (Rs 3.2 billion) annually as transponder lease cost.
Call centre operations could get integrated. The two companies cumulatively incur Rs 180 crore towards call centre services.
Valuation of deal
There is an almost 34% premium to the indicative market cap of Videocon d2h’s Nasdaq-listed ADRs, leading some analysts to say that the deal was expensive.
The share-swap ratio, however, seems justified looking at key parameters like revenue, EBITDA, subscriber-base and ARPU.
“When you look at it from parameters like revenue, EBITDA and subscriber base, the valuation seems to be fair. Videocon d2h’s EBITDA and revenue is close to Dish TV’s and ARPU is more,” says a media analyst.
As per the deal, Dish TV shareholders will own 55.4% of the enlarged new company. The remaining 44.6% stake in the merged entity will be with the Videocon d2h investors.
The Dish TV promoter holding in the enlarged new company will be 36% while the Videocon d2h promoters will own 28%. The remaining 36% will be with the public.
Another reason weighing in favour of the valuation of the deal is the understanding that the promoters of Dish TV are going to buy a 9% stake from the principals of Videocon d2h to increase their holding in the merged company.
With the additional purchase after the amalgamation, the Dish TV promoter holding will rise to 45% in the merged company.
“It is a merger and not a cash deal. Besides, the promoters of Dish TV can buy additional shares in a supplementary transaction to up their stake,” says a media analyst at a broking firm.
Dish TV promoters have the right of first offer to buy in case Videocon d2h promoters decide to further sell their stakes in the merged company.
Combined net debt is Rs 2,161 crore. Net debt to operating profit is 1.2 times.
Will size spur consolidation in the cable TV and DTH sector?
Leaving a big mark on the DTH sector, the Dish TV–Videocon d2h merger may prompt competitors to look at marrying.
Any kind of deal, big or small, can take place. Various theories are floating around. Will Tata Sky and Airtel Digital TV merge or get engaged in a buyout deal? Will Reliance Digital TV and Sun Direct resume talks? Can Reliance Digital TV be part of Tata Sky or Airtel Digital TV?
However, there is no immediate compulsion to consummate just because a new giant DTH company will be active sometime next year. The merger of Dish TV and Videocon d2h is expected to conclude in the second half of 2017, a few months after the new deadline ends on the final phase of digital addressable system (DAS) on 31 March 2017. The scramble for DAS Phase IV subscribers would have ended by then unless the government once again extends the sunset date.
Some senior executives of DTH companies also feel that for acquiring new subscribers it will be an open field and neither Tata Sky nor Airtel Digital TV will be at a disadvantage. As for Kalanithi Maran-promoted Sun Direct, it is positioned as a DTH company for the southern region and its low-ARPU business model will give it a distinct footprint. Reliance Digital TV in any case is not making attempts to grow and has stayed put with a subscriber base of five million for the last three quarters in a row.
But the possibility of deal-making in the future cannot be ruled out. The benchmark of a DTH company’s size has been laid by Dish TV and Videocon d2h. Biggies like Tata Sky and Airtel Digital TV would want to scale up while Sun Direct could position itself as a mid-tier DTH company. The course of action for Reliance Digital TV is uncertain.
Pricing power also could come if there is further consolidation in the DTH sector, some media analysts say.
How will the cable TV sector be impacted? Will it force MSOs to further consolidate?
According to DEN Networks CEO SN Sharma, several cable TV networks have consolidated over the years. “DAS provided an impetus for further consolidation. Some MSOs have already built scale,” he says.
In fact, there are three big national MSOs versus six DTH players (after the merger, DTH will have five private players). Even regional MSOs like GTPL Hathway and Fastway Transmissions have aggressively expanded their footprint to markets outside their home turf.
Digicable managing director and CEO Jagjit Kohli hopes that the deal counter would get activated in the cable TV sector. “Consolidation is good for the industry and shows that the distribution side of the broadcast business is getting matured. Maybe the merger deal in the DTH sector will act as a catalysis for MSOs to swing into action. Cable may go the DTH way, and we could see big-ticket deals in the sector,” he says.
Incidentally, Digicable has been looking to dilute stake and was in talks with all the big national MSOs.
Former Hathway Cable & Datacom MD and CEO Jagdish Kumar, however, does not believe that the Dish TV–Videocon d2h deal will necessarily trigger consolidation in the cable TV sector. The national MSOs, according to him, are entrenched in the urban areas and do not see any incremental threat coming from DTH companies. In DAS Phase IV areas, DTH in any case is expected to have a better run, as for national MSOs the cost to reach TV households may not justify the revenue potential.
Kumar rules out mega deals in the cable TV sector unless valuations improve. “The valuations of cable companies are currently extremely depressed to favour any big-ticket deal. Consolidation will happen only when valuations become more stable,” he says.
MSOs will expect valuations of their companies to improve in 2017 so that they can raise further capital to expand their video and broadband business.
2016: Jawahar Goel kick-starts DTH deal machine | TelevisionPost.com
