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TV18 BROADCAST
PRICE: RS.34 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.39 FY13E P/E: 35.5X
q Announces Rights Issues, Acquiring ETV Channels: TV18 Broadcast Ltd
(TV18) made important announcements yesterday relating with: 1/ rights issues
in TV18 and Network 18 (holding company of TV18), 2/ acquisition of stakes in
various ETV channels. The total funds raised through the rights issue would be to
the tune of Rs 40Bn, and TV18/ Network18 would emerge as debt-free entities
post the transaction.
q Freedom from debt, lower risk profile key positives: We believe TV18 valuations
have suffered from investor concerns on the high level of debt on TV18
balance sheet. As such, the fact that TV18 has a realistic opportunity to be debt
free would mean that TV18 assets would be valued more appropriately by the
market. The risks of financial distress and inefficient decisions due to debt overhang
are considerably reduced - and this has been appreciated duly by the market
yesterday.
q Financial Details of Acquired Entities Not Available, poses valuation
handicaps: TV18 management has chosen not to discuss the financials of the
acquired entities at the present stage, citing confidentiality agreements. As per
management, these details shall be available at a later stage, before the rights
issues. TV18 would likely see a dilution of over 187% post the rights issues, and
an outflow of Rs 21Bn for the stake it is buying. Therefore, the lack of even
ballpark figures for revenues/ profits is a significant handicap.
q Freedom at a High Cost: Our assumption-based analysis of ETV assets suggests
that TV18 may have paid an EV/ Sales (FY12E) multiple of 5.0x (high valuation -
Sun TV trades at 4.75x EV/ Sales, TV18 itself trades at 1.5x EV/ Sales) . Considering
the equity dilution arising from the rights issue and high price paid for the
acquisition, the value in the stock traded off for safety is significant.
q Upside Reduced Meaningfully, cut recommendation to ACCUMULATE: Ignoring
long-term impact that ETV-TV18 bouquet might have on the revenues (ignoring
synergies), we believe the upside to the stock stands reduced to Rs 38/
share (earlier fair value Rs 65/ share). We cut our rating to ACCUMULATE (from
BUY earlier). Until further financial details emerge, we would be uncomfortable
being invested at prices above Rs 39/ share, and would advice investors to reduce
at Rs 38+ (if the enthusiasm that was witnessed in yesterday's trade persists).
q Desperation to deleverage perhaps the need of the hour, maintain longterm
constructive view: While we think TV18 has paid aggressively for ETV
channels' acquisitions, or the extent of equity dilution, we are able to appreciate
that TV18 was facing a threat of becoming irrelevant if cash did not become
available soon. To that extent, we believe that TV18 has ensured longevity for its
business model following these transactions, as also some flexibility to complete
its bouquet/ invest in content as required. The announcements would also ensure,
we think, that TV18 is rewarded adequately on digitization that the company
is exposed to. We remain constructive on the long-term prospects of the
stock, and would consider turning buyers on declines.
Details of the Announcements Made
TV18 Broadcast Ltd. and Network18 have announced a rights issue of Rs 27Bn each.
The amount thus raised would be utilized for: a/ buyout of certain TV channels of
ETV, b/ paying off debt of TV18/ Network18 currently on books, c/ other working
capital requirements. After taking into account Network18's 51% stake in TV18
Broadcast, the total amount of funding that would be used up in the rights issues
would be Rs 40Bn. We note that the net debt on Network18's consolidated balance
sheet is Rs 14.4Bn (on TV18's consolidated balance sheet Rs 6.7Bn), and the total
amount used up in acquisition of ETV channels shall be Rs 21Bn. As per management,
there will be very little debt (working capital) on Eanadu balance sheet.
Therefore, post the completion of rights issues of both entities, TV18 Broadcast as
well as Network 18 (promoter entity of TV18 Broadcast) shall be completely debtfree.
At the promoter's end, the rights issues shall be funded by Independent Media Trust,
a trust founded for the benefit of RIL. The promoters shall subscribe to the rights
issue to their entitlement in full, and shall also reserve the right to subscribe to any
unsubscribed portion of the rights issues . Independent Media Trust shall also fund
the additional (over the entitled) amount that promoters may have to invest in the
rights issues.
TV18 Broadcast shall acquire: 1/ 100% in regional news channels in Hindi (ETV Uttar
Pradesh, ETV Madhya Pradesh, ETV Rajasthan and ETV Bihar and ETV Urdu channel
)("ETV News Channels"); 2/ 50% interest in ETV Marathi, ETV Kannada, ETV
Bangla, ETV Gujarati and ETV Oriya ("ETV non Telugu GEC Channels") and 3/
24.50% interest in ETV Telugu and ETV Telugu News ("ETV Telugu Channels"), for
a total consideration of not more than Rs 21Bn. TV18 shall have management control
over all except ETV Telugu channels, and shall have an option to buy the balance
50% interest in ETV non Telugu GEC Channels and additional 24.50% interest
of ETV Telugu Channels.
In a separate release Reliance Industries has said that via an investment of Rs 26Bn
by its group companies, holds various interests in ETV channels (100% economic
interest in all channels except ETV Telugu and ETV Telugu News), a part of which
(discussed above) is being divested profitably to Network18 Group companies. The
Promoter Group of Network18/ TV18 companies and Independent Media Trust, as
per RIL press release, have entered into a Term Sheet under which Trust would be
subscribing to optionally convertible debentures issued by the promoter companies.
The management of TV18/ Network18 has chosen not to divulge the details of the
optionally convertible debentures, including the timing, or the price of conversion.
The management has, however, assured that the promoters would fully subscribe to
the portion of rights issues that remains unsubscribed. Further, the promoter group
shall continue to have majority voting rights in Network18/ TV18 even if these optionally
convertible debentures were to be exercised.
The management has also refused to share the financials of the entities that it proposes
to acquire, while saying that most channels are EBITDA positive and the entity
on the whole is significantly EBITDA positive.
Immediate Implication for TV18 Broadcast
We assume in all the following analysis/ inferences that the announcements can be
brought to conclusion. Three factors matter most: 1/ relief to TV18 shareholder, from
fears of financial distress or costs of debt overhang, 2/ significant dilution in equity
(at maximum price, TV18 would be adding 675mn shares, implying a dilution of
187%, 3/ implications on TV18 near-term earnings, and valuations paid out by TV18
Broadcast.
As TV18 Broadcast's recent earnings show, a large part of the company's EBITDA is
consumed by interest expenses paid. Moreover, while the management of TV18
Broadcast says that the company is out of investment mode, it is important to remember:
1/ TV18 is unlikely to be a meaningful bouquet without addition of a Hindi
movie channel, 2/ We think that with the rise of Sony in the Hindi GEC sweepstakes,
the loss of momentum at Colors (Viacom18's Hindi GEC) has to be addressed
immediately. TV18 subscription revenues are yet in infancy and the company
can't afford to lose momentum until the point that the company has covered
significant ground versus legacy networks (Zee, Star) in so far as subscription revenues
are concerned, 3/ In the absence of immediate funding, TV18 Broadcast
might have been forced to reduce its holding in Viacom 18, which forms the core of
subscription revenues' projections/ value creation in TV18 Broadcast. To the extent
that these issues would be addressed through the rights issues, this is a positive development.
There is the other question of whether TV18 might have paid too high a price for the
assets acquired. There is little doubt that TV18 has paid aggressively for ETV channels.
First, the company has acquired only 50% of the entertainment channels, and
only 24.5% of the Telugu channels. We believe these are channels that matter in
the revenues (especially subscription revenues) that ETV generates. The management
has refused to share the financials of acquired entities. Going by revenues of
peers, and making certain assumptions, we think ETV revenues are unlikely to be
higher than Rs 7Bn, with subscription revenues accounting for ~20%-25% of these.
Of these, we believe, the acquired entities/ stakes would account for only 60% of
revenues (that is Rs 4.2Bn). Second, in our understanding, ETV channels should be
paid no more than an EV/ Sales of 2.0x FY12E, while TV18 appears to have paid out
~5x EV/ Sales for the same. Therefore, TV18 has likely overpaid by Rs 12.6Bn - significant
considering market capitalization of TV18.
Given that debt shall reduce to zero after the rights issue, and with the assumption
that the fair valuation and revenues of ETV acquired entities is Rs 8.4 Bn (see details
on assumptions in the Valuation section of the report), we believe that the resulting
enterprise value / market capitalization of the entity, post rights issue and post acquisition
would be in the region of Rs 40Bn. On a (diluted) equity of Rs 2074mn (FV
Rs 2/ share), this would translate into Rs 38.5/ share of TV18. Thus we find that
while risks have substantially reduced for TV18, the fair value of the stock has declined
significantly post this transaction.
Even as we cut our fair value estimates sharply, we maintain a constructive stance
on TV-18, considering that: 1/ the company stays in contention for the top networks
/ top Hindi GEC, and has substantial upsides in subscription revenues going forward,
2/ TV18 is, given low subscription revenues, a strong candidate to benefit from mandatory
digitization, 3/ the transactions pave the way for a comprehensive bouquet,
which may bring synergy benefits and add the 'bulk' necessary to compete with
legacy networks (Zee, Star).
We are unconvinced that the market shall appreciate the synergies that might accrue
from the transaction immediately. We also tend to think that the market is
unlikely to show undue haste/ enthusiasm in subscribing for the rights issues as envisaged.
These factors place a cap on TV18 upsides, in light of which we downgrade
the stock to ACCUMULATE.
Valuation: Significant trade-off of value for Sake of Safety
For the sake of simplicity, we take an EV/ Sales approach to explain our valuation
rationale for TV18. Television broadcasters trade between EV/ Sales multiples of
4.7x and 0.7x. Typically, news broadcasters trade at valuations of around 1x EV/
Sales, and (since Sun TV is an exception by way of sheer force of margins), entertainment
broadcasters should trade at valuations closer to 3.0x EV/ Sales. Broadly,
we think that entities with potential for subscription revenues (low viewer fragmentation,
strong demand pull) should trade at 3.0x EV/ Sales, while commoditized
genres should trade closer to 1.0x EV/ Sales.
We take this as the starting point for TV18 (existing operations) valuation. Since we
believe that 75% of TV18 revenue streams (50% from Viacom18, 25% from business
news) are well exposed to subscription revenues , we believe TV18 (existing
operations) should be valued at an EV/ Sales of 2.5x EV/ Sales FY12E. This results in
an EV of Rs 31.3Bn. Reducing from this the net debt of Rs 6.7Bn, we believe TV18
existing assets have a fair market value of Rs 24.6Bn, or Rs 68/ share on the existing
equity base (362mn shares). This is roughly in line with our prior fair value estimate
of TV18.
Add to these the amounts received from rights issue; i.e. Rs 27 Bn, to arrive at
market value of Rs 51.6Bn (Rs 24.6 Bn as above plus Rs 27Bn from rights issue). On
a diluted equity base of 1037mn this translates into value/ share of Rs 49.7. At this
stage, the reduction in value/ share is created by expansion of equity, at prices lower
than our assessed fair value of TV18.
Finally, we make certain assumptions on the value of ETC channels. Considering
that R-GECs carved out of Zee News in Oct, 2009 had FY10E sales of 4.7Bn, and
news operations of ETV are, in our opinion, unlikely to have higher sales than those
of the restructured Zee News (Rs 1.4 Bn in FY10E sales), we think that ETV Channels
(100%) are unlikely to bring in sales higher than Rs 7Bn in FY2012. We further assume
that ~70% of the sales would be generated by the regional GECs of ETV (of
most of which, TV18 buys only 50%). We think: 1/ sales that have been bought by
TV18 Broadcast are ~ 60% of total sales, 2/ the sales should be accorded a EV/
Sales multiple of no more than 2.0x EV/ Sales. This leads to a fair value of 8.4Bn for
ETV assets that TV18 has currently agreed to acquire. Therefore, TV18's purchase
has, to the extent that market prices of broadcasters reflect fair value and to the
extent that there are no meaningful synergies (this is an aggressive assumption -
there may be significant revenue synergies that emerge), resulted in an immediate
destruction of value of Rs 12.6Bn in the ETV transaction.
Finally, since TV18's existing operations continue to have the same value , and assuming
Rs 8.4Bn value of ETV acquired entities, we believe aggregate market value
of the proposed entity would be Rs 40.0Bn. With total of 1037mn shares outstanding,
the fair value / share is reduced to Rs 39.
Computation of fair value post the announced transactions
(Rs mn) FY12E
Sales, TV18 Broadcast, Existing Operations (pre-announcement) 12,646
Valuation Used - EV/ Sales (FY12E) 2.5
Value of Operations 31614
Less: Net Debt 6700
Market Value (Fair market capitalization) 24914
Shares Outstanding 362
Fair Value/ Share (before announcements made yesterday) 69
Post - Rights Issue
Shares Issued (assuming price of Rs 40, amont Rs 27 Bn) 675
Total Shares Outstanding 1037
Value of Operations 31614
Add: Net cash 20300
Fair Market Capitalization 51914
Fair Value/ Share (post rights issue, before ETV transactions) 50
Implied exchange of safety for value per share 19
Post Acquisition of ETV channels
Fair Value of Operations (TV18 present operations) 31614
Sales, ETV Total (not provided, assumed) 7000
Sales, ETV stake bought out by TV18 4200
Fair EV/ Sales, Acquired Stakes of Channels 2
Fair Value, Acquired Entities 8400
Fair Values, Operations Post restructuring 40014
Shares outstanding post rights issue 1037
Net Debt (assumed zero post transactions) 0
Fair Market Capitalization 40014
Fair Value/ Share. Post restructuring (Target price) 39
Implied Value Destruction/ share of diluted equity 11
Source: Kotak Securities - Private Client
Long-Term Implications of the Proposed Acquisition
TV18 Broadcast Will Raise Breadth of Broadcasting
Genre TV18 ETV Proposed Zee
Share Broadcast Entity Group
Hindi GEC 30.4 Ö Ö Ö
Hindi Movies 9.4 Ö
Tamil GEC 5.9 Ö
Telugu GEC 4.1 Ö Ö Ö
Cartoon/ Anim. 5.6 Ö Ö
Sports 1.9 Ö
Hindi News 3.4 Ö Ö Ö
Marathi GEC 3.8 Ö Ö Ö
Bengali GEC 3 Ö Ö Ö
Kannada GEC 2.7 Ö Ö Ö
Music 3.6 Ö Ö Ö
Malayalam GEC 1.3
Tamil Movies 0.9
Telugu Movies 1
Telugu News 1.1 Ö Ö Ö
Info./ Fact. Ent. 0.9 Ö Ö
English Movies 0.9 Ö
English News 0.3 Ö Ö
English Business News 0.1 Ö Ö
Hindi Business News 0.1 Ö Ö Ö
English Entertainment 0.2 Ö
Lifestyle 0.2
Other 19.2 Ö Ö Ö Ö
Source: TAM (last 4 weeks) viewership data, Kotak Securities - Private Client Group
We note that following the merger, TV18 Broadcast shall have a presence in most of
the key categories of television viewership, with the key exception of Hindi movies,
where we think TV18 would now be launching shortly. Presence of a complete,
competent bouquet is key to exploiting subscription revenue streams, as is demonstrated
by the large gap between Zee Entertainment and TV18 Broadcast (TV18
Broadcast subscription revenues are a tenth of Zee Entertainment subscription revenues).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TV18 BROADCAST
PRICE: RS.34 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.39 FY13E P/E: 35.5X
q Announces Rights Issues, Acquiring ETV Channels: TV18 Broadcast Ltd
(TV18) made important announcements yesterday relating with: 1/ rights issues
in TV18 and Network 18 (holding company of TV18), 2/ acquisition of stakes in
various ETV channels. The total funds raised through the rights issue would be to
the tune of Rs 40Bn, and TV18/ Network18 would emerge as debt-free entities
post the transaction.
q Freedom from debt, lower risk profile key positives: We believe TV18 valuations
have suffered from investor concerns on the high level of debt on TV18
balance sheet. As such, the fact that TV18 has a realistic opportunity to be debt
free would mean that TV18 assets would be valued more appropriately by the
market. The risks of financial distress and inefficient decisions due to debt overhang
are considerably reduced - and this has been appreciated duly by the market
yesterday.
q Financial Details of Acquired Entities Not Available, poses valuation
handicaps: TV18 management has chosen not to discuss the financials of the
acquired entities at the present stage, citing confidentiality agreements. As per
management, these details shall be available at a later stage, before the rights
issues. TV18 would likely see a dilution of over 187% post the rights issues, and
an outflow of Rs 21Bn for the stake it is buying. Therefore, the lack of even
ballpark figures for revenues/ profits is a significant handicap.
q Freedom at a High Cost: Our assumption-based analysis of ETV assets suggests
that TV18 may have paid an EV/ Sales (FY12E) multiple of 5.0x (high valuation -
Sun TV trades at 4.75x EV/ Sales, TV18 itself trades at 1.5x EV/ Sales) . Considering
the equity dilution arising from the rights issue and high price paid for the
acquisition, the value in the stock traded off for safety is significant.
q Upside Reduced Meaningfully, cut recommendation to ACCUMULATE: Ignoring
long-term impact that ETV-TV18 bouquet might have on the revenues (ignoring
synergies), we believe the upside to the stock stands reduced to Rs 38/
share (earlier fair value Rs 65/ share). We cut our rating to ACCUMULATE (from
BUY earlier). Until further financial details emerge, we would be uncomfortable
being invested at prices above Rs 39/ share, and would advice investors to reduce
at Rs 38+ (if the enthusiasm that was witnessed in yesterday's trade persists).
q Desperation to deleverage perhaps the need of the hour, maintain longterm
constructive view: While we think TV18 has paid aggressively for ETV
channels' acquisitions, or the extent of equity dilution, we are able to appreciate
that TV18 was facing a threat of becoming irrelevant if cash did not become
available soon. To that extent, we believe that TV18 has ensured longevity for its
business model following these transactions, as also some flexibility to complete
its bouquet/ invest in content as required. The announcements would also ensure,
we think, that TV18 is rewarded adequately on digitization that the company
is exposed to. We remain constructive on the long-term prospects of the
stock, and would consider turning buyers on declines.
Details of the Announcements Made
TV18 Broadcast Ltd. and Network18 have announced a rights issue of Rs 27Bn each.
The amount thus raised would be utilized for: a/ buyout of certain TV channels of
ETV, b/ paying off debt of TV18/ Network18 currently on books, c/ other working
capital requirements. After taking into account Network18's 51% stake in TV18
Broadcast, the total amount of funding that would be used up in the rights issues
would be Rs 40Bn. We note that the net debt on Network18's consolidated balance
sheet is Rs 14.4Bn (on TV18's consolidated balance sheet Rs 6.7Bn), and the total
amount used up in acquisition of ETV channels shall be Rs 21Bn. As per management,
there will be very little debt (working capital) on Eanadu balance sheet.
Therefore, post the completion of rights issues of both entities, TV18 Broadcast as
well as Network 18 (promoter entity of TV18 Broadcast) shall be completely debtfree.
At the promoter's end, the rights issues shall be funded by Independent Media Trust,
a trust founded for the benefit of RIL. The promoters shall subscribe to the rights
issue to their entitlement in full, and shall also reserve the right to subscribe to any
unsubscribed portion of the rights issues . Independent Media Trust shall also fund
the additional (over the entitled) amount that promoters may have to invest in the
rights issues.
TV18 Broadcast shall acquire: 1/ 100% in regional news channels in Hindi (ETV Uttar
Pradesh, ETV Madhya Pradesh, ETV Rajasthan and ETV Bihar and ETV Urdu channel
)("ETV News Channels"); 2/ 50% interest in ETV Marathi, ETV Kannada, ETV
Bangla, ETV Gujarati and ETV Oriya ("ETV non Telugu GEC Channels") and 3/
24.50% interest in ETV Telugu and ETV Telugu News ("ETV Telugu Channels"), for
a total consideration of not more than Rs 21Bn. TV18 shall have management control
over all except ETV Telugu channels, and shall have an option to buy the balance
50% interest in ETV non Telugu GEC Channels and additional 24.50% interest
of ETV Telugu Channels.
In a separate release Reliance Industries has said that via an investment of Rs 26Bn
by its group companies, holds various interests in ETV channels (100% economic
interest in all channels except ETV Telugu and ETV Telugu News), a part of which
(discussed above) is being divested profitably to Network18 Group companies. The
Promoter Group of Network18/ TV18 companies and Independent Media Trust, as
per RIL press release, have entered into a Term Sheet under which Trust would be
subscribing to optionally convertible debentures issued by the promoter companies.
The management of TV18/ Network18 has chosen not to divulge the details of the
optionally convertible debentures, including the timing, or the price of conversion.
The management has, however, assured that the promoters would fully subscribe to
the portion of rights issues that remains unsubscribed. Further, the promoter group
shall continue to have majority voting rights in Network18/ TV18 even if these optionally
convertible debentures were to be exercised.
The management has also refused to share the financials of the entities that it proposes
to acquire, while saying that most channels are EBITDA positive and the entity
on the whole is significantly EBITDA positive.
Immediate Implication for TV18 Broadcast
We assume in all the following analysis/ inferences that the announcements can be
brought to conclusion. Three factors matter most: 1/ relief to TV18 shareholder, from
fears of financial distress or costs of debt overhang, 2/ significant dilution in equity
(at maximum price, TV18 would be adding 675mn shares, implying a dilution of
187%, 3/ implications on TV18 near-term earnings, and valuations paid out by TV18
Broadcast.
As TV18 Broadcast's recent earnings show, a large part of the company's EBITDA is
consumed by interest expenses paid. Moreover, while the management of TV18
Broadcast says that the company is out of investment mode, it is important to remember:
1/ TV18 is unlikely to be a meaningful bouquet without addition of a Hindi
movie channel, 2/ We think that with the rise of Sony in the Hindi GEC sweepstakes,
the loss of momentum at Colors (Viacom18's Hindi GEC) has to be addressed
immediately. TV18 subscription revenues are yet in infancy and the company
can't afford to lose momentum until the point that the company has covered
significant ground versus legacy networks (Zee, Star) in so far as subscription revenues
are concerned, 3/ In the absence of immediate funding, TV18 Broadcast
might have been forced to reduce its holding in Viacom 18, which forms the core of
subscription revenues' projections/ value creation in TV18 Broadcast. To the extent
that these issues would be addressed through the rights issues, this is a positive development.
There is the other question of whether TV18 might have paid too high a price for the
assets acquired. There is little doubt that TV18 has paid aggressively for ETV channels.
First, the company has acquired only 50% of the entertainment channels, and
only 24.5% of the Telugu channels. We believe these are channels that matter in
the revenues (especially subscription revenues) that ETV generates. The management
has refused to share the financials of acquired entities. Going by revenues of
peers, and making certain assumptions, we think ETV revenues are unlikely to be
higher than Rs 7Bn, with subscription revenues accounting for ~20%-25% of these.
Of these, we believe, the acquired entities/ stakes would account for only 60% of
revenues (that is Rs 4.2Bn). Second, in our understanding, ETV channels should be
paid no more than an EV/ Sales of 2.0x FY12E, while TV18 appears to have paid out
~5x EV/ Sales for the same. Therefore, TV18 has likely overpaid by Rs 12.6Bn - significant
considering market capitalization of TV18.
Given that debt shall reduce to zero after the rights issue, and with the assumption
that the fair valuation and revenues of ETV acquired entities is Rs 8.4 Bn (see details
on assumptions in the Valuation section of the report), we believe that the resulting
enterprise value / market capitalization of the entity, post rights issue and post acquisition
would be in the region of Rs 40Bn. On a (diluted) equity of Rs 2074mn (FV
Rs 2/ share), this would translate into Rs 38.5/ share of TV18. Thus we find that
while risks have substantially reduced for TV18, the fair value of the stock has declined
significantly post this transaction.
Even as we cut our fair value estimates sharply, we maintain a constructive stance
on TV-18, considering that: 1/ the company stays in contention for the top networks
/ top Hindi GEC, and has substantial upsides in subscription revenues going forward,
2/ TV18 is, given low subscription revenues, a strong candidate to benefit from mandatory
digitization, 3/ the transactions pave the way for a comprehensive bouquet,
which may bring synergy benefits and add the 'bulk' necessary to compete with
legacy networks (Zee, Star).
We are unconvinced that the market shall appreciate the synergies that might accrue
from the transaction immediately. We also tend to think that the market is
unlikely to show undue haste/ enthusiasm in subscribing for the rights issues as envisaged.
These factors place a cap on TV18 upsides, in light of which we downgrade
the stock to ACCUMULATE.
Valuation: Significant trade-off of value for Sake of Safety
For the sake of simplicity, we take an EV/ Sales approach to explain our valuation
rationale for TV18. Television broadcasters trade between EV/ Sales multiples of
4.7x and 0.7x. Typically, news broadcasters trade at valuations of around 1x EV/
Sales, and (since Sun TV is an exception by way of sheer force of margins), entertainment
broadcasters should trade at valuations closer to 3.0x EV/ Sales. Broadly,
we think that entities with potential for subscription revenues (low viewer fragmentation,
strong demand pull) should trade at 3.0x EV/ Sales, while commoditized
genres should trade closer to 1.0x EV/ Sales.
We take this as the starting point for TV18 (existing operations) valuation. Since we
believe that 75% of TV18 revenue streams (50% from Viacom18, 25% from business
news) are well exposed to subscription revenues , we believe TV18 (existing
operations) should be valued at an EV/ Sales of 2.5x EV/ Sales FY12E. This results in
an EV of Rs 31.3Bn. Reducing from this the net debt of Rs 6.7Bn, we believe TV18
existing assets have a fair market value of Rs 24.6Bn, or Rs 68/ share on the existing
equity base (362mn shares). This is roughly in line with our prior fair value estimate
of TV18.
Add to these the amounts received from rights issue; i.e. Rs 27 Bn, to arrive at
market value of Rs 51.6Bn (Rs 24.6 Bn as above plus Rs 27Bn from rights issue). On
a diluted equity base of 1037mn this translates into value/ share of Rs 49.7. At this
stage, the reduction in value/ share is created by expansion of equity, at prices lower
than our assessed fair value of TV18.
Finally, we make certain assumptions on the value of ETC channels. Considering
that R-GECs carved out of Zee News in Oct, 2009 had FY10E sales of 4.7Bn, and
news operations of ETV are, in our opinion, unlikely to have higher sales than those
of the restructured Zee News (Rs 1.4 Bn in FY10E sales), we think that ETV Channels
(100%) are unlikely to bring in sales higher than Rs 7Bn in FY2012. We further assume
that ~70% of the sales would be generated by the regional GECs of ETV (of
most of which, TV18 buys only 50%). We think: 1/ sales that have been bought by
TV18 Broadcast are ~ 60% of total sales, 2/ the sales should be accorded a EV/
Sales multiple of no more than 2.0x EV/ Sales. This leads to a fair value of 8.4Bn for
ETV assets that TV18 has currently agreed to acquire. Therefore, TV18's purchase
has, to the extent that market prices of broadcasters reflect fair value and to the
extent that there are no meaningful synergies (this is an aggressive assumption -
there may be significant revenue synergies that emerge), resulted in an immediate
destruction of value of Rs 12.6Bn in the ETV transaction.
Finally, since TV18's existing operations continue to have the same value , and assuming
Rs 8.4Bn value of ETV acquired entities, we believe aggregate market value
of the proposed entity would be Rs 40.0Bn. With total of 1037mn shares outstanding,
the fair value / share is reduced to Rs 39.
Computation of fair value post the announced transactions
(Rs mn) FY12E
Sales, TV18 Broadcast, Existing Operations (pre-announcement) 12,646
Valuation Used - EV/ Sales (FY12E) 2.5
Value of Operations 31614
Less: Net Debt 6700
Market Value (Fair market capitalization) 24914
Shares Outstanding 362
Fair Value/ Share (before announcements made yesterday) 69
Post - Rights Issue
Shares Issued (assuming price of Rs 40, amont Rs 27 Bn) 675
Total Shares Outstanding 1037
Value of Operations 31614
Add: Net cash 20300
Fair Market Capitalization 51914
Fair Value/ Share (post rights issue, before ETV transactions) 50
Implied exchange of safety for value per share 19
Post Acquisition of ETV channels
Fair Value of Operations (TV18 present operations) 31614
Sales, ETV Total (not provided, assumed) 7000
Sales, ETV stake bought out by TV18 4200
Fair EV/ Sales, Acquired Stakes of Channels 2
Fair Value, Acquired Entities 8400
Fair Values, Operations Post restructuring 40014
Shares outstanding post rights issue 1037
Net Debt (assumed zero post transactions) 0
Fair Market Capitalization 40014
Fair Value/ Share. Post restructuring (Target price) 39
Implied Value Destruction/ share of diluted equity 11
Source: Kotak Securities - Private Client
Long-Term Implications of the Proposed Acquisition
TV18 Broadcast Will Raise Breadth of Broadcasting
Genre TV18 ETV Proposed Zee
Share Broadcast Entity Group
Hindi GEC 30.4 Ö Ö Ö
Hindi Movies 9.4 Ö
Tamil GEC 5.9 Ö
Telugu GEC 4.1 Ö Ö Ö
Cartoon/ Anim. 5.6 Ö Ö
Sports 1.9 Ö
Hindi News 3.4 Ö Ö Ö
Marathi GEC 3.8 Ö Ö Ö
Bengali GEC 3 Ö Ö Ö
Kannada GEC 2.7 Ö Ö Ö
Music 3.6 Ö Ö Ö
Malayalam GEC 1.3
Tamil Movies 0.9
Telugu Movies 1
Telugu News 1.1 Ö Ö Ö
Info./ Fact. Ent. 0.9 Ö Ö
English Movies 0.9 Ö
English News 0.3 Ö Ö
English Business News 0.1 Ö Ö
Hindi Business News 0.1 Ö Ö Ö
English Entertainment 0.2 Ö
Lifestyle 0.2
Other 19.2 Ö Ö Ö Ö
Source: TAM (last 4 weeks) viewership data, Kotak Securities - Private Client Group
We note that following the merger, TV18 Broadcast shall have a presence in most of
the key categories of television viewership, with the key exception of Hindi movies,
where we think TV18 would now be launching shortly. Presence of a complete,
competent bouquet is key to exploiting subscription revenue streams, as is demonstrated
by the large gap between Zee Entertainment and TV18 Broadcast (TV18
Broadcast subscription revenues are a tenth of Zee Entertainment subscription revenues).
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