A merger wave in media

What explains the spate of mergers and acquisitions (M&As) in media? According to the FICCI-EY annual report, the industry saw 118 M&A deals valued at Rs 67,200 crore in 2021. That is a huge jump from 77 deals worth Rs 6,800 crore in 2020 and 64 deals, valued at Rs 10,100 crore, in 2019. About half of these, by value and volume, were in broadcasting and almost a third in gaming.

Of these the biggest, arguably, was the December 2021 merger of Sony and Zee into a Rs 14,000-crore behemoth. It creates India’s second largest media company after Disney-Star.

This year has seen two big ones so far. At the end of March 2022, India’s largest multiplex chain PVR merged with rival Inox Leisure to create a 1,500-screen film exhibition company. More recently in April, Bodhi Tree Systems, an equal joint venture between Uday Shankar, the former president of The Walt Disney Company Asia Pacific and former Chairman of Star and Disney India and Lupa Systems Founder and CEO, James Murdoch, picked up a reported 40 per cent stake in Viacom18 for Rs 13,500 crore.

A mix of history, the pandemic and its cascading effects are among the reasons for this action.

Take history. When Netflix got into streaming video in 2007, it was not clear what was being set in motion. Even when it started commissioning originals, starting with the House of Cards in 2013, things were fuzzy. But soon, the combination of the internet, streaming, devices and technology began reshaping the entertainment media world, irrevocably.

A new set of players 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) began first by dabbling and then by investing in content. These firms wanted to drive either search or commerce or something else — but essentially they needed huge audiences to do that. And therefore most morphed into media firms. Amazon has Prime Video, so that it can sell more groceries and shoes. YouTube gives heft to Google’s search business.

Their hunt for audiences across geographies, technologies, languages, tastes, formats and devices began redrawing the global entertainment map. It became evident that in this market 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. At that time Disney was over two times Fox’s size.

Just like the global map, the landscape in India was also being redrawn. Zee changed hands and so has Viacom18. The battle for dominance in media and entertainment is now being fought among a handful of firms — Disney-Star, Sony-Zee, Jio, Bharti Airtel, Google, Netflix, Amazon Prime Video and maybe a couple of others. Many of the remaining ones such as Sun TV and the Times Group — are bound to sell or merge if they want to survive in a market full of heavies.

Much of this would have happened gradually. But, and this is reason number two, the pandemic speeded things up. It has stressed both top lines and bottom lines across the Indian media and entertainment business. For example, PVR and Inox saw 90 per cent of their top lines wiped out for the year ending March 2021. As a result, their combined revenue was less than Rs 1,000 crore. This meant they did not need Competition Commission of India approval. “If there was no Covid, this deal wouldn’t have happened,” says Abneesh Roy, executive director, Edelweiss Financial Services.

The third reason, and the obvious one, is inflation caused by macroeconomic factors such as rising fuel costs and the changing nature of the business. The search for audiences by large companies means there is a need to deliver more of the spectacle film, the spectacle show or the spectacle sport. This is across OTT, TV or theatre — Pushpa, RRR, Gangubai Kathiawadi are 20-30 times more expensive than regular films. The average cost of an OTT show is over Rs 40 lakh an episode; compare that with Rs 10 to 15 lakh for a half hour episode on linear TV. The market now demands more of these. The pressure on the content ecosystem means a shortage of good writers and actors. Talent costs alone have gone up by 40-50 per cent over the last three to four years. Consolidation helps cut costs and scale up.

Much of this action is a force of good. For all its gargantuan consumer numbers, the Indian media business is pathetically under-monetised. Take television, for instance. At over 892 million viewers and about 210 million TV homes, India is the second largest television market after China. Yet margins remain less than half of, say Brazil, a market that has less than half as many TV homes. The reason — price regulation, fragmentation and therefore, low revenue per unit. The consolidation and, therefore, scale this round brings should, hopefully, lead to a healthier, more profitable business.

http://twitter.com/vanitakohlik