The M&A wave: Is there a pattern to what looks like a spate of media deals?

• On April 27, Bodhi Tree Systems, an arm of James Murdoch’s Lupa Systems, announced it was investing Rs 13,500 crore for a reported 40 per cent stake in the Rs 3,200-crore Viacom18, which houses 38 channels such as Colors and MTV, and owns an OTT, Voot.
• At the end of March 2022, India’s largest multiplex chain PVR merged with rival Inox Leisure to create an over 1,500-screen entity. It will now control over a fifth of all theatre screens in India.
• Earlier in December 2021, Sony and Zee merged to create India’s second largest media company after Disney-Star. The duo will control 28 per cent of all TV viewed in India and two OTTs, Zee5 and SonyLiv.

Is there a pattern to what looks like a spate of media deals?

“Yes,” says Ashish Pherwani, partner, media and entertainment, EY India. “Whether it is on OTT or broadcasting or films, high-concept and tentpole (big-spectacle) content is working. It costs several times more than regular content, which too has become more expensive due to Covid and talent shortages,” he says. “Consolidation helps media firms have tentpole content across Hindi and other languages to attract and retain consumers.” He reckons talent costs alone have gone up by 40-50 per cent over the last 3-4 years. The average cost of an OTT show is over Rs 40 lakh an episode; compare that with Rs 10-15 lakh for a half-hour episode on linear TV. “Last year, India produced 2,500 hours of original content just for OTT. Somebody has to pay for it,” says he. That’s one of the things driving consolidation.

The second is the pandemic, which has stressed both toplines and bottom lines across the Rs 1,614-billion Indian media and entertainment business. Entire categories such as radio have been marginalised. Both PVR and Inox had seen 90 per cent of their topline wiped out by the year ending March 2021. As a result, their combined revenue was less than Rs 1,000 crore. “So, they needed no CCI (Competition Commission of India) approval. If there was no Covid, this deal wouldn’t have happened,” says Abneesh Roy, executive director, Edelweiss Financial Services. “They have both been through a tough time and there is the threat from OTT.”

That is a third pressure point: Digital is forcing a fundamental change in how people consume media and in the very definition of a media company, say analysts. It is no longer about those three hours on TV or 50 minutes online. Media consumption is now a 24-hour cycle with everything, from Facebook, Google, WhatsApp, Netflix and what not, fighting for your wallet and eyeballs (see box). As a result, some of the largest media firms are looking desperately for scale to drive growth and cut costs.

“Media is a winner-takes-all game. A small, fragmented player cannot last,” says Roy. Enter consolidation.

The Sony-Zee deal, for instance, “creates a combined entity that can fight with Disney-Star. Now Reliance will up the ante. Uday (Shankar, former Disney-Star CEO and now Murdoch’s partner in Bodhi Tree) has a lot of core competence for scaling up sports for Viacom18. From a one-horse race, it is a three-horse race in sports, entertainment and media,” says Roy.

While the details of the Lupa-Viacom18 deal are hazy, the Rs 13,500-crore infusion marks the partial exit of Viacom18 parent, Paramount, from the India market. It also marks the re-entry of former Star chairman Murdoch into India, sans father Rupert Murdoch and along with Shankar and a bunch of Star managers. This is the team that took Star from a struggling Rs 1,600-crore broadcaster to a Rs 14,000-crore media conglomerate — the one that created Hotstar, bid for and won the rights to the Indian Premier League (IPL) and created the Pro-Kabaddi League. The other partner in Viacom18 is a subsidiary of Reliance Industries, which has a 51 per cent stake.

The deal, say analysts, is largely about investing in sports (read IPL). It is the biggest traffic driver on Disney+ Hotstar. “This looks like Reliance raising money for cricket rights without spending, while also getting on board an executive who knows how to get it,” quips Parry Ravindranathan, co-founder Converjpay and former managing director of Bloomberg Media. You could argue whether the IPL is worth it at a reported reserve price of Rs 36,000 crore. Disney-Star made money on it in the fifth year after paying just over Rs 16,000 crore. One analyst reckons that if the bidding goes beyond Rs 40,000 crore, the firm winning it will not make money. It is this rise in prices for programming assets that will ensure consolidation continues.

Pressure to team up

When Netflix got into streaming video in 2007, it was not clear what it was setting in motion. But when it started commissioning originals, beginning with the House of Cards in 2013, the game changed irrevocably. A new set of companies emerged. Apple (1.8 billion users; $366 billion revenue), Alphabet (parent of Google and YouTube; 4.3 billion users, $258 billion revenue), Facebook (2 billion users, $118 billion revenue) and Amazon ($470 billion revenue) are blowing up billions to capture the audience that studios and broadcasters traditionally dominated.

It was clear that the players with the biggest pockets and platforms would have the best negotiating power. That is why in 2018, Rupert Murdoch chose to sell Twenty First Century Fox’s entertainment assets, including Star India, to The Walt Disney Company. Meanwhile, Zee changed hands, thanks to a debt crisis and the promoters were reduced to a 4 per cent share. Sony, which was looking to consolidate, grabbed it.

Like the global map, the Indian one too is being redrawn. The battle for dominance will be fought between a handful of firms — Disney-Star, Jio, Google, Netflix, Amazon Prime Video, Sony-Zee and maybe a couple of others. Many of the remaining — notably Sun TV and the Times Group — are bound to acquire or sell out, if they want to survive.