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Why Did Reliance Buy Network18 When It Already Owned Network18?

The buzz in the media industry is that Reliance Industries (RIL) has decided to buy Network18. What fantastic news, you think, until you understand that Reliance Industries:

  • already quasi-owned a substantial chunk of Network18
  • and are asking remaining shareholders to sell their shares at less than current market price

Wait a second. There’s got to be juicy stuff here, right?

(Warning: My answer involves conjecture. You’re likely to be disappointed)

But first, the boring but required history

To Keep Things Short

  • Reliance owned a good chunk of the Eenadu channels, it seems (Source: Check my own post)
  • TV18 wanted to buy Eenadu, we don’t really know why.
  • TV18 runs the CNBC TV18, CNBC Awaaz and the CNN-IBN set of TV Channels
  • They didn’t have the money either. They planned to raise it from their investors.
  • So Reliance decided to help. Not by giving TV18 money – that would be too obvious.
  • They gave the promoters of TV18’s effective owner, Network18 – money through optionally convertible debentures. These would convert to 99.9% ownership of those companies, meaning Reliance would effectively control Network18 and TV18 if they wanted. (Source: Competition Commission PDF)
  • After all this, TV18 would get money, use some of it to retire debt and the rest to buy the Eenadu stake from RIL.
  • This was a complex mechanism for RIL to pay itself but it was done anyhow.
  • The rights issues for Network18 and TV18 were at Rs. 30 and Rs. 20 respectively, in 2012. They went through, and the Bahls – the promoters of Network18 – got themselves a juicy 70%+ ownership that was effectively RIL’s through their convertible debentures
  • To avoid having to actually aggregate Network18 into their consolidated results, this whole thing was done through a trust, called the Independent Media Trust (IMT), whose sole beneficiary was RIL (and which was funded by RIL)

Fast Forward to May 29, 2014

RIL has officially bought out Raghav Bahl’s ownership. They’ve decided to fund IMT to actually buy the stake of the Network18 promoters, and eventually will own TV18 as well.

This triggers a lot of SEBI regulations, so they have to make open offers to:

Lots of top management of Network18 have quit, and apparently RIL has been hiring media people to potentially replace them. Rajdeep Sardesai and Sagarika Ghose will quit, as has Raghav Bahl and many other top people in the company.

The Open Offers Won’t Work

Yes, we’re getting open offers. But they won’t work.

Because Network18’s price in the market is Rs. 45 today, and TV18 is at Rs. 34. Both at 10% above the offer price. Why would you sell to RIL for lower?

(Infomedia is trading below but it’s too small to be worth the discussion)

So they really don’t want to acquire the rest of the shares. They will if they have to, I guess, since that’s the offer; but if the market remains at this level, the offer won’t get much response.

Which means:

  • The companies remain listed
  • Reliance spends nothing (it’s payment to Raghav Bahl was already made in 2012)

But Why Did They Bother?

So if RIL already quasi owned stake in the Network18, why did they formally acquire Network18 and TV18? It’s not evident, and they’re saying it’s some kind of deal about their 4G license. Which to be honest, seems like a load of bull because Reliance has simply not done anything with their 4G license so far and they already controlled the company anyway.

So the answer has to be something else. But what?

I don’t know much. No one tells me anything because I’m a relative nobody. So I’m going to make some guesses.

It’s about taking over Network18. Network18 has been losing money forever. And Reliance probably needs to change that, and will have to be in the driver’s seat.

It might be something in the new Companies Act, 2013. The act has some crazy requirements of companies that issue debentures, including those that convert to shares.

Bahl wanted out. You can only be a pawn that long.

(Something more sinister?)

The Management Trust Issue Continues To Be A Problem

If Network18 continues to be listed then it’s going to have to deal with the fact that there is an ESOP Trust called Network18 Senior Management Welfare Trust that owes it over 500 cr. This was given in the past to effectively buy Network18 shares in the market. Capital Mind has written about it extensively.

Given the structure of the deal, it might still not be required that RIL consolidate the results of Network18/TV18 with its own. Because in the middle lies a trust, the IMT. (I don’t know the law well enough though) This management trust issue is not something RIL wants on its hands, apart from the crazy web that Network18 has become over the years. (See Posts One, Two, Three)

I wish the employees of Network18 the very best. I hope they don’t get fired, but it seems like the people who would have fired them have been asked to leave.

And if you’re wondering if Network18 is a good buy at this price, I have a Suzlon to sell you.

  • manish says:

    Wait, what?
    “…Reliance has simply not done anything with their 4G license so far…”
    They are doing a ton of things to get the service up and running, granted as a consumer you may not see that because the service has not launched. But, they are burning through cash to pay for all the capex spending to build out and test the 4G infrastructure.

  • amitvik.m says:

    Crazy games of corporates

  • dheeraj says:

    That Mar 29 date is a typo, isnt it? Or, something did happen on that date – that we came to know only now?

  • Ravi says:

    Just around the time Lok Sabha were to elections start, I was telling one of my friends that eventually Rajdeep will quit CNNIBN soon, my friend just smiled and said I think too much. fast forward to today, he was flabbergasted hearing this news and asked me why I had said what I’d said. My answer was simple, CNNIBN, I see less of sleight lately and news is, covered, somewhat in a balanced manner compared to other TV channels. Many things published weren’t too amiable to some biz empires… it was simply putting 2 plus 2 together in my head, may turnout farfetched sometime.
    I see NDTV anchors crestfallen off late, esp Ms Dutt, if her interview of Amita Shah was any indication, NDTV will be hard pressed for any breaking news. TimeNow will be new NDTV of Modi govt, most likely. How many channels really played up the TRAI ordinance fiasco?
    I guess you know, Ratan Tata and Cyrus Mistry didn’t attend Modi’s swearing in, Reliance and Adani heads did. Can you read between the lines? any indications of what might be in store?
    I agree with your points, content for 4G services is a nice little spin off to the story. everyone knows or at least have an idea of what lies underneath. sorry for digressing from the topic… but if you look at a bigger picture, you can connect a lot of loose ends.
    I’d read your old posts on network18 🙂 You do a great job. the only fear though is, when you are too good and start getting famous, people(powerful) will want you to peddle their stories. :P:P .
    sorry for long rant and some digression.

  • ....pd.... says:

    “Ah 🙂 But man they’ve had the licence so long I keep wondering what they are waiting for 🙂 ”
    Probably they were waiting for a Govt. change.. They must have thought about this way back, when people like us were not having any slightest idea..

  • paresh says:

    if we think out of business, it can be politically too. at least it looks to me, cos modi in seat and same group ranting against NAMO all along, and with this cosmetic change like open offer n resignation we can see management changes which was needed to keep moving and move out so called news trader and investor gets favor other way. thats wat it seems kichidi pak rahi hai. rest we will come to know in days to come.

  • EV says:

    Is it just me, or does Reliance acquiring a TV network, stink like the Satyam-Maytas scandal, a company buying a non-core company.

  • Murty says:

    I still remember the Video Ads on Reliance Mobile, which were full of promise.
    OK, forget about the scam.
    From a company point of view, why would it get a 4G Licence and keep quiet? First, you will get it at a cheaper rate.They also knew the spectrum and the technology(Call it Smart Phones) are not available at the time of getting the licence. The ROI of introducing the same at that point of time is not good enough, and also the penetration of Smart Phones(Call it compatibility for 3G or 4G) is not good enough. So, just wait for a few years, assess the subscriber depth(Jio introduced 150 channels now ) and more significantly, the subscriber base rose from hardly 8 million in 2004 to 10 Cr. now , in addition to the 6 Crore DTH base. Now they will go for the kill, Maximize the revenue, with minimum cost. Please correct me …….