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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.

  • Sunil Arora says:

    Interesting read. One thing that is clear for me is that Network18 or TV18 becomes financially strong. Raghav fronts for the deal but is effectively out ( I call is bailout ).
    What I am going to do is to put in lot of money into the fixed deposits of some of these companies if they are still open.

  • Ashish says:

    Thanks Deepak for a wonderful analysis and links.
    Almost all ‘deals’ or splits in recent past of the Network 18 have been criticized. One wonders if investors’ interest is now just a bookish term.
    I also think that retail investors ultimately loose money because of such ‘moves’ and this ultimately results in loss of trust by retail investors in markets.

  • Praveen says:

    eenadu is publishing daily an article about the unaccounted money flowing into Jagathi Publication/Sakshi paper (it’s rival owned by YS Jagan s/o late YS Rajasekhar Reddy) but it never commented on the unofficial money came into its company at any time until now!!!! eenadu always blames only Jagathi Publication while YS Jagan had many other big companies with his late father blessing. eenadu ariticles will be like more to defame it’s rival then to empower readers

  • Raja says:

    Superb piece! Is Nimesh Kamplani, of the JM Financial fame ?
    Crisil has been sending IER reports (almost one a month) since Nov 10 to individual investors giving a buy call on JM Financial when it was on Rs 40/-, giving a price target of 45/-.
    It’s now at 12/-.
    Regards
    Raja

  • This deal is an indication towards the consolidation of television business in India. There are already a lot of players in the industry and in present conditions there is very low probability of many new channels coming in because there are very channels that are making profits. So satisfy the ambitions of big players like RIL with huge financial muscles, consolidation seems to be in offing as this will not increase competition. RIL will enter the entertainment business without increasing the numbers of player, it is eventually safeguarding its own interests.

  • Krish says:

    I am unable to understand many issues in this deal. Barring big media umbrella, there is no common business between ETV regional channels and TV18. Why TV18 would like to buy these regional channels persuing inorganic growth needs an explanation.
    Except RIL buying for 2600 Cr some years ago, there is no financial data available on the valuation of these regional channels to justify the pricing that TV18 came forward to pay.
    There is no doubt that TV18 debt burden with this deal is going to increase even with rights issue. TV18 is already reporting loss. I am sure it is the same case with the ETV regional loss. Post merger, these losses is going to further widen.
    The increased debt burden coupled with deep losses could almost pose the survival threat to the existence of TV18 itself. Should this deal go through, there is no doubt that retail share holders would be hit hard. It’s clear signal to dump the stock and FDs of this company.

  • Apurva says:

    Hi, Good analysis,
    Can you provide some more details when Reliance acquired stake in Eenadu. I think that is equally interesting. So combining both scenarios how will you conclude the deal.

  • Mathew stalin says:

    Shame on the Indian national media (business channels, business newspapers, equity research companies, stock market/investment related portals) and its dumbness. shame on the morons working in the national media. Mukesh Ambani invested Rs 2600 crores in Eenadu at the behest of Chandrababu naidu (part consideration for the KG gas basin deal). Not even a single business news paper, news channel, equity research comapnies, investment related portals have spoken about this bribe/corruption. Nimesh kampani and the shell companies were used as front to route the kickbacks money into eenadu.
    A country with a population over billion cannot even produce a single quality equity research report. And the worst thing that pains me is that all the news channels are filled with dumb punjabi beauty models who work as news readers.

    • Do you have any proof of this? Can it even be proved? Unless you have a whistleblower, no. So why blame equity analysts? It’s easy to point fingers but when your reputation depends on it and you have no proof other than a point of view – then it’s better to shut up. this part consideration for KG gas etc are things people talk about all the time, but I find that difficult to believe unless there is more proof. At least the link I pointed out has stuff that can be independently verified.

  • Sanjeev B says:

    The Fraudex link no longer has any data. It’s been wiped clean.