TV18 paid slightly steep price for ETV channels: I-Sec

However, Vikash Mantri, AVP-Research, ICICI Securities feels that acquisition of ETV has been made at a slightly higher valuation. Speaking about the deal, Mantri says that there is a lack of clarity in ETV’s financials. There is some good news as well as he thinks ETV has a good bouquet of channels.

Post the deal, both Network18 and TV18 will get rid of debt. Mantri points out that paring down debt is dependent on rights issue subscription. Boards of both -- Network18 and TV18 -- have approved rights issue of Rs 27 billion each. TV18 rights issue proceeds, at a price of not more than Rs 40 per equity share, will be utilised to repay the existing debt, fund the acquisition of ETV channels and fund working capital needs.

(Note: Web18, which owns Moneycontrol.com and Indiaearnings.com, belongs to the Network 18 Group).

Below is an edited transcript of Vikash Mantri's interview to CNBC-TV18. Also watch the accompanying video.

Q: You had the chance to speak to the management yesterday, what did you take away on the fine print of the deal?

A: While the deal is good in terms of getting the funding for the group and which will potentially make it debt free, there are certain questions that remain unanswered and limits the analysis, in terms of the impact for the shareholders and the minority shareholders.

The key question element here is the financials of ETV Broadcasting Channels for which the group is paying close to Rs 2,100 crore. If I were to look at financials of peer companies, Zee News regional bouquet was acquired by Zee and that was valued at close to Rs 1,300 crore, hence,  one has to see the reason behind a valuation of Rs 2,100 crore, and prima-facie, it looks like a very expensive buyout of ETV Broadcast Channels by the TV18 Group.

Q: For both TV18 companies though that is TV18 and Network18, how would you read the move in terms of fact that they hope to remove debt and get to a zero debt status?

A: Removal of debt is subject to the fact that the rights issue gets completely subscribed and whether the minority shareholders pitch in to fund the rights issue or whether it is the Indian Independent Media Trust which comes in and funds it or the promoter entities which funds this rights issue.

The debt could have always been reduced by doing a rights issue of this nature. What remains difficult to understand is this argument for buying a company worth Rs 2,100 crore. So, while debt reduction is very good, an expensive buyout is a significant negative.

Q: What is your own sense of the kind of content ETV holds and what kind of market share it enjoys on various properties at this point?

A: ETV has a good bouquet of channels on an overall basis. It is one of the leaders in the Marathi regional general entertainment channel (GEC) space and a strong player in the Telgu GEC space. In most of the markets, it is not among the top two players other than the markets of Oriya GEC and Guajarati GEC, which relatively has seen no competition at all.

So, while on bouquet performance their Marathi and Telgu properties are really very good and they would compare in similar lines to regional GECs of Zee TV, however, they have a lesser markets share in each of these markets.

This acquisition however only entails 50% buyout of the regional GEC Channels and 100% buyout of largely the news channels. In the Telgu news channels, the economic interest is close to only 24.5% and they continue to remain as an investment and the management of TV18 will not get a controlling stake on the ETV Telgu channels. So, there is a concern here, however, regional GEC channels are a good bouquet but definitely not worth Rs 2,100 crore.

Q: What about the issue of dilution because the rights issue is quite significant in size? How do you access the kind of dilution which will happen in both those companies, both the listed entities post the rights issues?

A: If I were to assume that the rights issue happened at upper-end of the band, which is Rs 40 for TV18 and around Rs 60 for Network18, it would entail close to 3X times dilution for TV18 so the equity get bloated by 3X for that matter for TV18. If the minority shareholders which account to close to upwards of 40% here were not to subscribe at all to the rights issue then their holding will fall as low as 11-12%, which will not be permissible as a holding structure by the promoters. So, it is very essential for the minority shareholders to pitch in into this account.

Q: Some of your peers have suggested that there is a slim chance in case the promoter shareholding goes up that much that in case there is a delisting option open. Did you at all get the sense that that could be an optioned exercise?

A: It is more of an option that the promoters will like to go forward to. While the holding structure of the Group at the promoter level will have a significant amount of debt given by Independent Media Trust through optionally convertible debentures, clearly one has to see in case of delisting what happens to the ownership at that point of time because at least when there is a debentures they have asset while it is not as a collateral, controlling stake continues to remain with the current promoters.

The relationship there to gauge is very important and delisting also could mean a change in controlling or whatever the terms of the agreement, at the promoter entity remains. So, I would see a de-listing not as a viable option for the promoters here.

Q: Did you get enough by detail on the optionally convertible debentures or the OCD format through which Reliance is doing this funding? Do you think it’s a deal between two promoters and therefore does not matter to the minority shareholders or could it have a material bearing on the minority shareholders of the two listed entities?

A: In terms of financials it doesn’t basically matter to a Network18 shareholder who is the promoter, or who is the owner here. Clearly, the press release says that the controlling stake remains with Raghav Bahl but there has been no details given with respect to what is the nature of the OCDs.

And if it was pure debt, why it was not pure convertible debentures? Why are they optionally convertible debentures and not pure debt alone? So, definitely there is a structure of conversion. However, it is very important for a minority shareholder to know who owns the company or in what cases can the ownership change that should be very clear to the minority shareholder to which we have no clarity as of now.