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The Fringe Impact of the RIL-TV18 Deal

Reliance Industries (RIL) has sold its stake in media entity Eenadu to TV18, in a convoluted complicated deal quite characteristic of RIL and TV18. Let me help you decode.

First, the more recognized sources:

What is the deal?

1. RIL owns stake in Eenadu TV. 100% in regional news and entertainment channels, and 49% in telugu channels of ETV. This was purchased for 2600 cr.

2. RIL is selling part of this to TV18 – the full 100% of the regional news channels, but only half of their stake in the entertainment and Telugu channels. (TV18 will still get the right to buy the rest of Reliance stake, but we don’t know at what price)

3. TV18 will pay Rs. 2100 cr. for this, according to their Press Release. Reliance, in it’s press release, says the stake in the channels is "being profitably divested". We’ll revisit this.

4. But TV18 doesn’t have the money.

5. So they’re going to fund the purchase through a mega rights issue of Rs. 2700 cr. "Rights" means existing shareholders get to buy in the proportion of their holding, not outsiders.

6. More than 50% of TV18 is owned by Network18 (the parent), which also doesn’t have the money even to buy into the rights issue.

7. Therefore, even Network18 will announce a total fund raise of Rs. 2700 cr. Due to the cross holding, the total amount actually raised will be Rs. 4,000 cr.. Out of this, the promoters – read: Raghav Behl and the like – will put in Rs. 1700 cr.

8. But even the promoters won’t put most of the money themselves – instead, they will get money from Reliance! They will borrow money from "Independent Trust" which is an RIL entity, and the borrowing will be "optionally convertible" to shares. We don’t know more details, but this is quasi ownership, through optionally convertible debentures.

9. Infotel, that RIL investment in 4G and BWA, gets all the Eenadu and TV18 web and media content as a "preferred" partner to sell through its pipes. We don’t know when, though.

Result

TV18 gets access to the Eenadu TV portfolio. Raghav Bahl retains control of TV18 and Network18, until Reliance decides to convert its ownership to equity.

Reliance gets official entry into media (till now the holdings weren’t so well known), and gets to record a profit. Infotel gets content to sell through its pipe, when that happens.

TV18 and Network18 went up 20% each yesterday, and are up 7-10% today already. Reliance has gone up 2.5%.

Reliance pays itself and makes a profit?

Reliance is paying TV18 promoters who will buy into a TV18 rights issue which gives TV18 the money to buy from Reliance. That is what this deal is, and the beauty is in the books:

Reliance has sold part of its media investment, at what they say is a profit. That means they get to record a profit in the Jan qtr or whenever the deal is finalized. (And they funded that purchase, so they "bought" profits!) The funding part is a balance sheet item and changes nothing on the profit and loss statement.

Now Reliance bought for 2600 cr. and TV18 is buying for 2100 cr. – where is the profit? Reliance retains a part of their media holding in Eenadu, which I am sure will be valued at >500 cr. (some banker will certify it – who’s to disagree?). That gives Reliance the profit – we don’t know how much, though – that might only be visible next qtr.

RIL and Media companies?

A source – anonymous – writes about how, through a web of companies, Reliance has been building its own entry into the media space. The deal goes through Nimesh Kampani (who fronted the ownership, buying into Eenadu in 2008, and who is close enough to have mediated talks between the Ambani brothers) and then a slew of cross-held private companies.

Who’s going to buy into the rights issue?

Apart from the promoters, that is. They haven’t got the prospectus to SEBI yet, and I’m looking forward to the juicy details. We don’t know the price (Network18 is less than Rs. 60 a share, and TV18 less than Rs. 40 – both are significantly higher than their pre-announcement prices).

We don’t know who will buy – the share is likely to go up to "excite" people, and will be managed quite well by speculators.

Strangely, a good part of promoter stake is owned by "Senior Professional Welfare Trust"; This is the entity which borrows money, using Network18’s holdings as collateral! Oh, such circular logic – these two companies deserve each other.

And wait, let’s look at the market capitalization of these companies:

Network18 has 14.26 cr. shares. Even at today’s price of Rs. 53, that’s a market cap of 756 cr.

TV18 Broadcast has 36.21 cr. shares. At today’s price of Rs. 38, that’s a market cap of 1376 cr.

Both these companies are raising 2700 cr. each through rights issues. That is quite remarkable, and it’ll be interesting to see who buys in. It’ll take an awesome bull market to pull this off – and to get the FIIs and mutual funds to buy in as well. It’ll depend on the pricing of the issue, and then the market price.

Is there a trade?

I’m not touching Network18 right now. (I can’t stand the market manipulation in the stock – not blaming entities, but this share behaves as if it’s rigged). But the trade in it will be to let the euphoria die and then short it.

As for Reliance, this won’t impact them much.

Disclosure: no positions.

Now open to more questions and revelations. Thanks for reading.

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