Last month, the Aditya Birla Group picked up a 27.5 per cent stake in the India Today Group for an undisclosed sum. In January this year, Mukesh Ambani’s Reliance Industries funded the merger of Eenadu TV (which it owned) with Network18 in a complicated deal. In December last year, Abhey Oswal’s Oswal Green Tech picked up a 14.2 per cent stake in NDTV for Rs 24.24 crore.
It is not as if corporate India has just started investing in the media and entertainment (M&E) sector. Bharti Airtel has a direct-to-home (DTH), media outsourcing and music business. The Tata Group is the majority investor in one of India’s largest DTH firms, Tata Sky. It also dabbled in film-making some years back. The Aditya Birla Group ventured into TV and films. The Mahindras have nurtured a niche publishing business, and made films with Mumbai Mantra. Rajan Raheja’s Hathway Investments owns Outlook and Hathway Cable and Datacom. But rarely has there been an acquisition spree like the one we are seeing.
Why are Indian corporate houses putting their money into what looks like a difficult sector?
The Rs 80,000-crore M&E industry has disappointed both financial and strategic investors. Largely, investors have not been able to make a sufficient return from the sector. An analysis of 13 listed M&E companies (excluding Zee), from their initial public offer price to the one on May 31 this year, is revealing. The return on stock prices of six companies saw a positive compounded annual growth rate (CAGR); the rest were all negative. Of these six, only one – UTV – has seen a CAGR in double digits. Others have grown between one and nine per cent.
You don’t need this analysis to know that investors are not making money on M&E in India. The deal flow tells the same story. From a high of $553 million in 2007, private equity investment in the sector slumped to $94 million in the first five months of 2012, according to VCCEdge data. Investors are simply not looking at the M&E industry in India.
In a market with over 350 million consumers with buying power, double-digit ad growth and increasing media penetration, the story should have been different. It isn’t.
Consider DTH broadcasting. More than $4 billion (Rs 22,000 crore) has been sunk into it, over nine years, and by six operators. So far only one is making an operating profit. While DTH has brought transparency to the industry and better pay revenues for broadcasters, price regulation, excessive taxation and a restrictive policy have kept it from making money.
This is the story across the M&E industry. Ad hoc regulation, extreme fragmentation and, in many cases, the inability of companies to set up processes to build scale profitably have held back business plans from becoming a reality.
Now add media owners wedded to their majority shareholding. More than 60,000 cable operators, dozens of small newspapers and TV companies, all in love with their fiefdoms, make consolidation, scale and, therefore, profitability difficult.
The Rs 1,789-crore Network18 group built scale aggressively, acquiring companies and partnering with anyone who came along. But it finally got so overleveraged that its debt was equal to its top line last year. The Rs 1,500-crore India Today Group has reportedly been struggling with the losses on its daily, Mail Today. However, both the firms have what investors call good assets. Network18 has CNBC, Colors, Forbes, MoneyControl.com, among others. And India Today has its magazine division and its TV company — which owns, among other channels, Aaj Tak.
Therefore, there was a need for investment in these companies. Since financial investors don’t want to fund any more growth, large media companies, as strategic investors, would have been the best bet. However, Indian media firms are too small to swallow acquisitions of this size, so it had to be international ones. But most foreign media firms are struggling with a slowdown in their home markets. They don’t have the appetite to attempt a complicated one like India.
That left only one category of investors — Indian corporate houses. And that brings us back to the question: if returns are poor in the M&E industry, why are they investing?
One, because they can get something beyond returns. This could be influence. But you could argue, like many of them do, that they don’t need a media house to wield influence. And corporate houses that have owned M&E companies have not always had a good time. Hathway Investments’ hounding by tax authorities for what Outlook wrote many years back is a case in point.
Two, and this is the most likely reason, because they want to learn the media business. They are willing to sacrifice a few percentage points in returns because an investment helps them learn the business. This takes time — which corporate investors have, unlike financial ones. It also suits media owners struggling with the long-gestation reality of the Indian market.
Wait and watch, then, to see how these new-style marriages work out.
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