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Sun Direct, Astro, Reliance Digital TV and the sniffing of a deal

MUMBAI: For billionaire Anil Ambani, holding on to his anaemic direct-to-home (DTH) business makes no sense. The future of Reliance Digital TV under the debt-laden Reliance Communications is dark, as it struggles with a tiny 2% market share in a rapidly growing DTH universe of 62.65 million active subscribers. The way out is its acquisition by Malaysia-based Astro in a separate deal, along with the merger of RCom’s wireless business with Aircel.

Though Astro has interests in DTH, it will be too far-fetched to think that it will have the ambition to run Reliance Digital TV on its own. The sector is hyper-competitive, there are too many players and Reliance Digital TV is like a half-built enterprise. Consolidation is the path ahead after Dish TV and Videocon d2h agreed to merge their assets to create the world’s second-largest DTH company by subscribers.

If a deal is to be hatched, Reliance Digital TV will necessarily have to move to Sun Direct. For Astro, the utility will be in strengthening Sun Direct, the company in which it has a 20% stake. Taking Astro’s acquisition route as a transitionary step will mean that the Malaysian company will increase its stake in Sun Direct subsequent to a merger. The other route could be a direct acquisition by Sun Direct.

A lot on the course of the deal will, however, depend on how ambitious Kalanithi Maran is to expand his DTH empire. Reliance Digital TV offers him scope to expand north and set base in the Hindi-speaking market (HSM), where Sun Direct is almost absent. With investments and strategic push, the combined entity can grow from a mid-sized outfit to a top-tier company.

It was with this appetite that merger talks had begun between Sun Direct and Reliance Digital TV way back in 2013. Back then, the idea was to combine two mid-sized DTH companies to become a formidable player. But the deal could not conclude due to a disagreement on valuation.

Clouds still darken the prospects of a deal. If anything, Reliance Digital TV has lost market share and grown weaker. The Sun Direct–Reliance Digital TV combine will not alter the DTH hierarchy in India, as the other four private operators have grown in size and scale during this period. Wading through debt is another matter of concern and could prove to be a thorn in the deal.

“It isn’t going to be easy to conclude the deal. Reliance Digital TV’s business is going down each year in terms of market share. Valuation will be an issue and debt will pose to be a hurdle,” a media analyst said.

A new problem is that Astro is wanting to walk out of India when it comes to the media business. Last month, Astro asked NDTV to buy out its 49% stake in NDTV Lifestyle Holdings, an investment it had made in 2010 for $40 million. NDTV Lifestyle Holdings owns and operates lifestyle channel NDTV Good Times.

Last year, Astro sold its 73% stake in Turmeric Vision, the company which owns and operates the FoodFood channel. Astro has been retreating from its media businesses in India ever since question marks were raised by investigating agencies over the Aircel-Maxus deal.

Sun Direct is also under no pressure to expand geographically. The DTH operator has been able to maintain its market share in South India at about 40%. In the company’s net subscriber base, the share of South India has increased to over 97% from about 94% during FY14.

Being part of the Sun TV group, Sun Direct has a high brand recall in the South Indian markets. With the focus being on South India, Sun Direct relies a lot on the content of its group’s television channels, which have a significant audience share in those markets. There is less dependence on the Hindi entertainment channels.

“Sun Direct can ignore the north market and still exist as a profitable mid-sized DTH company in the southern region. There is no need for it to look beyond and acquisition of Reliance Digital TV is not a compulsion,” said a media analyst at a broking firm.

Still, the rationality for a deal exists. This can get a trigger point if Maran stretches his ambition to becoming a pan-Indian DTH company. Though having a very thin base, Reliance Digital TV will complement Sun Direct’s subscriber base as it has very little share in the south.

An area of concern is that Sun Direct’s net subscriber base has remained nearly stagnant for over four years. The company’s market share has fallen to 10% from 12% in FY14. The total active DTH subscriber base is pegged at 62.65 million, as of 31 December 2016. For subscriber additions, the deal can help Sun Direct to tap the north.

The deal will also help Sun Direct to improve its bandwidth requirements. As both Reliance Digital TV and Sun Direct use the Measat 3 satellite, a merger of the beams is possible using a software update on the set-top boxes (STBs) of the subscribers. A deal with Reliance Digital TV will mean Sun Direct can add more spectrum and HD channels.

Sun Direct uses four transponders from GSAT 15 and four transponders from Measat 3. Out of the four transponders on GSAT 15, three were added in FY17. The addition of the transponders has enabled the company to increase the number of HD channels its offers to 55.

“The addition of bandwidth will help Sun Direct to not only retain but also add subscribers while enhancing its ARPU [average revenue per user]. HD bandwidth will enable it to reach out to a wider audience especially in the urban segments and improve its subscriber base,” said another media analyst.

Unlike the phase when the first merger talks were on, Sun Direct’s financial health has improved and the company has turned around. After incurring losses till FY16, the company has hit profitability. For the first nine months of FY17, Sun Direct posted a net profit of Rs 21.2 crore even as ARPU climbed. Total income stood at Rs 907.93 crore in the first nine months of FY17. In FY16, Sun Direct had narrowed its net loss to Rs 35.30 crore compared to Rs 156.92 crore a year ago. Total operating income grew to Rs 1,116.61 crore in FY16, up from Rs 1,048.62 crore in the earlier year.

With Sun Direct turning profitable, the promoters need not infuse equity funding to support the company. For the next three financial years, Sun Direct has a capital expenditure plan of Rs 1,475 crore. Out of this, the intent is to have a debt funding of Rs 450 crore during FY18–FY20. The future capital expenditure of the company is expected to be supported through internal accruals and debt, with no further dependence on promoters’ contribution.

For Reliance Digital TV, the only possibility of a deal is with Sun Direct. While Dish TV and Videocon d2h are merging, Tata Sky and Airtel Digital TV will stand to gain nothing from a Reliance Digital TV buyout.

RCom, which has a total debt of close to Rs 45,000 crore, has got a reprieve from lenders to postpone debt servicing till December. The company is planning to reduce its liabilities by 60% with the Aircel merger and the sale of tower assets to Brookfield. It is also looking to unload its DTH business to cut its debt. It has been mulling hiving off its DTH business for a long time.

“Maran has shied away from venturing into the north. It will be interesting to see if in DTH he has a different perspective,” the analyst stated.

The Kalanithi Maran-promoted Sun TV group has presence across various forms of media including television, radio, dailies, weekly magazines and channel distribution. The promoters of the Sun TV group hold 80% stake in Sun Direct while South Asia Entertainment Holding Ltd (SAEHL), a wholly-owned subsidiary of Astro, owns the remaining 20% stake.

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