Direct-to-home television operator Dish TV will merge with Videocon d2h, creating India's largest media company by sales. Dish TV is the market leader in the DTH space while Videocon is the third largest by subscribers. Their combined sales in FY16 were Rs 5,920 crore, more than Zee Entertainment, which had sales of Rs 5,850 crore. Both Zee and Dish are part of Subhash Chandra's Essel Group.
The merged entity will be named Dish TV Videocon Ltd. It will operate three brands - Dish TV, Zing and Videocon d2h. The combined subscriber base would be 27.6 million, as of end-September.
As far as DTH is concerned, from a current market share of 25% for Dish TV, the new entity will have a market share of 45%, nearly double the size of the second largest DTH operator Tata Sky with a share of 24.2%. However, despite the size, Macquarie analysts do not think that there will be issues with the Competition Commission given that India has 7 DTH players as compared to 2-4 in most countries.
Dish TV chairman and managing director Jawahar Goel indicated a multiple brand strategy would be followed, as each is a string one and this would help cater to a diverse customer base at various price points. The merged entity will have a 16 per cent share of the 145-million subscriber pay-TV market.
As part of the deal, Vd2h shareholders will get 2.021 new shares in the merged entity for every share in Vd2h. This will translate to 55 per cent ownership for current Dish TV shareholders in the merged entity; Vd2h owners will get 45 per cent. At the market cap of Nasdaq-listed Vd2h, there is a 34 per cent premium paid to the company for the merger, say analysts. The Dish management, however, said the valuation was fair.
The Dish TV management indicated that it will try to keep margins (combined FY16 margin at 31%) at about 30% and improve post the deal gaining on cost and scale efficiencies. The merged entity will have a combined net debt of Rs 2,161 crore and net debt to operating profit of 1.2 times, which according to analysts is manageable. Analysts at Macquarie in a report indicated that the merged entity would have bargaining power in terms of content deals, taking price hikes and lowering subsidy burden. They expect margin benefit from synergies to the tune of 340-450 basis points.
Dish TV Videocon will be led by Jawahar Goel as chairman and managing director. The Vd2h principals shall have the right to nominate two directors on the Dish TV Videocon Board, one of whom shall be vice-chairman and the other a deputy managing director.
Saurabh Dhoot, executive chairman of Vd2h, said: "We are excited at how in the long term, the combination can unlock significant value for shareholders, and the synergies."
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Adding: "The Videocon group has extensive distribution and service expertise, with set-top box sourcing and manufacturing advantages. Dish TV has extensive media experience and content sourcing. Clearly, a DTH platform catering to 25-30 million subscribers could have big scale benefits. The merger would enhance our ability to grow alternate revenue streams such as carriage, advertising, value-add services and new channel launches."
At the close of the proposed transaction, the current promoters of Dish TV shall continue as promoters of Dish TV Videocon. The Dish TV principals are also in discussion with the Vd2h principals to purchase some of the latter's shares in Dish TV Videocon after the amalgamation.
The proposed transaction is subject to approvals, including from the Securities and Exchange Board of India, the stock exchanges, shareholders and creditors of both companies, the Competition Commission of India, the high court in Mumbai and the ministry of information and broadcasting. It is expected to close in the second half of 2017.
Morgan Stanley is acting as exclusive financial advisor to Dish TV and YES Securities (India) for Vd2h. The others involved are EY, SR Batliboi & Co, Luthra & Luthra Law Offices for Dish TV, and KPMG, Shardul Amarchand Mangaldas & Co, and Edelweiss Capital for Vd2h. Shearman & Sterling is international legal advisor to both for US federal securities law and related aspects of the proposed transaction.