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GBN IPO Analysis

Global Broadcasting Network (GBN) is coming out with a primary issue (IPO):

Total money needed: Rs. 105 cr.
Price band per share: Rs. 230(LB) to Rs. 250 (UB)
Shares offered: 45.65 lakh (LB) or 42 Lakh (UB)
Total shares post IPO: 2.71 cr (LB) or 2.67 cr (UB)
Period: 15th – 18th Jan 2007

LB = Lower Band, UB=Upper Band

What is GBN?
GBN owns and operates CNN-IBN, an English News channel focussed on India. The Promoters of the company are TV-18 and Raghav Bahl, a well known media personality. Other known personnel are Sameer Manchanda, Rajdeep Sardesai and Haresh Chawla, who are part of the top management of the company.

Loss making company
The company has made a 46.5 cr. loss in FY 2005-06 and a 25.8 cr. loss in the first six months of FY 2006-07. They are also cash flow negative meaning there is no current turnaround, so I estimate this full years loss to be around 50 cr. Adding them up they have about a 100 cr. loss, which is around Rs. 40 per share, over two years.

Net worth is very low
Current networth is about 42 cr. Going forward if they have another 25 cr. loss in the last six months, the networth will drop to Rs. 16 cr but with the IPO proceeds of Rs. 105 cr. to Rs. 120 cr. or so. This is about Rs. 45 per share, and

I don’t see a turnaround happening very soon, so it may just happen that the networth will be seriously eroded.

What is the new money being used for?
46 cr is to buy a 49% stake in BK Fincap, a holding company that has an interest in Jagran TV, the owner of the IBN-7 Hindi News channel.

Another 25 cr. will be used to retire a loan from ICICI bank.

The remaining money will be used to fund corporate expenditure, and to pay off the expenses for the issue.

Investment in BK Fincap
46 cr. will be invested in BK Fincap, which is an indirect 49% investment into IBN-7, a Hindi news channel. Unfortunately this has also been making losses, at about the same level as CNN-IBN itself – 25 cr. in the first six months of FY 2006-07. Further, IBN-7 is in the same business (TV News) as CNN-IBN, and will have similar turnaround times – so my guess is that this investment will take a very long time to realise any profit, probably greater than 5 years.

Additionally, the investment will be less than 50%, with the actual control being with the Gupta group. So for 46 cr., CNN-IBN will get less than 50% of a company that has more than 66 cr. of accrued losses.

This may be something that may see a return over 5 years or more, and nothing at this point is very visible.

Repayment of loan to ICICI bank
25 cr is to be used to pay back a high interest loan from ICICI Bank. The loan has a 10% interest currently, and the rate can change every year. There may be a pre-closure charge but they haven’t mentioned how much. A 3% charge which is common for retail loans will be a further Rs. 75 lakhs spent on pre-closure. But closing the loan is a good thing because it is a 2.5 cr. hit every year, and will reduce losses by around 5%. Additionally interest rates have risen, so keeping debt costs lower is definitely advised.

There are two other big loans – 32 cr. at 9% from ICICI bank, and about 10.2 cr. credit facility from Yes bank at 10.5%.

Remaining money
After the loan repayment, investment in BK Fincap and issue expenses, around 30 Cr. will be left over. This is not enough for much – the company spends that much on production and admin costs in 6 months! Given that the cash flow is so highly negative, and that losses are already high, this 30 cr. provides very little buffer for operating expenses.

What will happen if they need more money to fund costs? I don’t think revenues will go up drastically in the near future. They will have to take another loan, perhaps at a higher rate (since interest is already high) or go in for a secondory public issue. Either way investors will suffer.

No upper cap for issue expenses
The IPO offer document has no upper cap for the issue expenses. I would imaging that at the most this should be 5-6 cr. but it has not been mentioned. I don’t like the no-upper-cap bit, because it gives the company and the merchant bankers the freedom to take more money as they like it, and in the process, the investors are harmed.

I don’t know if SEBI requires an upper cap of expenses as a % of the issue price, but it must be made mandatory. Why should investors not know about such costs beforehand?

High Salaries and remuneration
Sameer Manchanda has been promised Rs. 5 cr. as a one time payment when the company makes an initial offer. That’s 5 cr. of the IPO money down. Manchanda and Rajdepe Sardesai draw over Rs. 3 cr. as remunerator (each), while most of the other top brass receives less than 10 lakhs!

It’s a little disconcerting to see such high salaries in the face of such bad financial performance. On a different note: Mr. Haresh Chawla, the joint managing director of the company along with Manchanda, and who has similar responsibilities as Sardesai and Manchanda, draws no salary! While a no-salary-until-profitability approach works, it should not be done by one person while the others draw huge sums (3 cr each) as salary – it should be followed by all top management.

Does not own the web site
GBN has earlier transferred the ownership of it’s web site (www.ibnlive.com) to a promoter group company, Web 18 Software services limited. GBN retains about 15% equity in that company though. But the transfer of the ownership means that GBN will not get any advertising revenue from the web site, and perhaps not much from any of the other subscription services offered.

The web site transfer is a shame. I think the IBN Live website was one of the best in the industry and could have generated enormous value going forward, both advertising and subscription related. But they’ve closed that door.

Competition
The offer document says CNN-IBN has done better than its competition in the English news channel category. I’m not sure what to believe here, but I believe the news channel industry is quite hotly contested, between all the different language options – just Hindi and English channels include Star News, NDTV (2 channels), CNN, BBC, Headlines Today, Aaj Tak, Times Now. Then there are tons of regional language channels, most of which provide a local flavour. Plus you can add the business news channels you have NDTV Profit, CNBC TV18 and CNBC Awaaz; the stories tend to overlap.

This is mega competition, and there may be no way to price yourself higher. Further, with CAS and DTH coming up, this channel will have to offer itself free or at a discount to subscribers, in my opinion.

Price of the issue
The issue is priced at Rs. 230 to Rs. 250. This gives it a total valuation of Rs. 675 cr at the upper band, which is quite high considering it makes big losses and has only one channel (One and a half if you consider the half ownership of IBN-7). There is very little networth to talk about, and the return does not look positive in the next two-three years. I think the share should have been priced at around Rs. 60 or so, a slight premium to the forward networth. Rs. 230 to 250 is simply too expensive.

Current bull run
This current market is in a bull run and may provide very high valuations to the company based on sentiment. Fundamentally, this stock isn’t worth investing yet, but if you want to take advantage of short term momentum, this may provide an opportunity. However, as shown in the Cairn IPO, such a strategy might backfire. Investors are getting smarter.

Scarcity
Only about 44 lakh shares are being issued. Existing shareholders are locked in for one year to three years, so their shares will not be available for purchase immediately. This means there will be very few shares available, so that may drive up prices. Again, such ideas are not fundamental; they are driven by momentum. Eventually sanity must prevail.

Also note that because the issue is for only Rs. 105 cr. there will probably be oversubscription in the market. That means if you put your money down right now, you will end up getting fewer shares than you bid for; and that will drive lower absolute returns.

My Verdict
Don’t buy. If you really like this company, like I do, wait for six more months, till the fiscal 2006-07 results are announced. Based on that, you can take a call. Of course, if you are a momentum investor or want to take advantage of the scarcity of the issue, you can attempt to take a call – my analysis is purely fundamental.

Other Analysers:
Hindu Business Line says Avoid; valuations are higher than NDTV which has more channels, an established base and good advertising revenue when there was no competition.

“K”, a blogger, says GBN is not on Tata-Sky, and not free on CAS, which is a negative for shareholders.

Murky Waters Research mentions the IPO, but straddles the fence, giving no real verdict.

Dalalstreet.biz recommends a buy-and-hold for long term, risk taking investors. But the author will personally skip the issue because very low allotment is expected. Plus, he doesn’t like the registrar, Intime.

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