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Will 100% FDI lure Comcast and Liberty to enter India?
MUMBAI: Using the cap on foreign direct investment (FDI) as a fence, the Indian government had restricted foreign firms from taking over news broadcasters, distribution platforms and FM radio companies in India.
Now that has changed to some extent. The Narendra Modi-led BJP government has lifted the FDI ceiling and introduced a three-part policy to bring in more investments.
While carriage companies like cable, direct-to-home (DTH), headend-in-the-sky (HITS) and mobile TV will have access to 100 per cent FDI, the cap on TV news channels and FM radio has been hiked from 26 per cent to 49 per cent. The government’s nervousness on print news media continues and the limit of 26 per cent FDI has been left untouched.
Let’s first open our eyes to the broadcast carriage services sector like cable TV and direct-to-home (DTH)
With digitisation to be implemented in Phases III and IV, there will be a need for heavy doses of capital over the next few years. Estimates peg the funding size to be anywhere between Rs 15,000 crore (Rs 150 billion) and Rs 20,000 crore (Rs 200 billion). Cable broadband, still in a stage of infancy, will also need massive capital infusion.
Sure enough, foreigners are welcome. Who wouldn’t love to dig into the financial and technical resources of a Comcast or John Malonne’s Liberty Global? They have been pursuing deals of huge sizes in the US and Europe, seeking to offer bundles of TV, internet and phone services.
“With China blocked, India is probably the last market that offers such size and scale for companies like Comcast and Liberty. Cable TV assets could be attractive for them,” says Pradeep Parameswaran, chief executive officer of DEN Networks, the multi-system operator (MSO) that got Goldman Sachs to invest $110 million for a 17.8 per cent stake in 2013.
With no need for sharing life with a local partner, the possibilities are immense. Even telecom companies could step in as they have done in other parts of the world. In 2013, Vodafone Group, for instance, acquired Kabel Deutschland, Germany’s largest cable company, for $10 billion.
“Globally, telecom companies have aggressively got into the broadband business. With full foreign ownership allowed in the cable TV sector, the wired footprint could be a strategy telcos may consider adopting in India as they take on Reliance Jio,” says Hathway Cable & Datacom MD and CEO Jagdish Kumar.
The reality is that some of the major Indian telcos have gone the DTH way. Airtel (Airtel Digital TV), Tata Group (Tata Sky, a JV between Tata Group and Star India) and Reliance Communications (Reliance Digital TV) have launched their DTH service to reach consumer homes through an additional route. For them, cable TV is hard to manage and the last-mile access to the consumer home still lies with the local cable operator (LCO).
For a sector that has been open to as much as 74 per cent FDI, there are more reasons than one as to why global distribution platform operators have not been enticed by the Indian cable companies whereas private equity firms have participated in stake acquisition.
Several sore points remain. While digital addressable system (DAS) got introduced in India three years back in Phase I cities, issues like consumer billing and packaging of television channels have not been sorted yet. The revenue share equation between the MSO and the LCO is yet to be resolved.
“The sector was in any case reasonably unregulated so far as FDI goes. Just because the FDI has been hiked from 74 per cent to 100 per cent does not mean that the global majors will line up for entry into India. The attractiveness does not change structurally but only becomes marginally better. The underlying truth is that cable companies have to make money,” avers Parameswaran.
While reiterating that the FDI hike is a positive step in the right direction, Kumar wants the government to make the business climate more conducive. “The 8 per cent adjusted gross revenue (AGR) applicable for MSOs offering broadband services is an irritant. Entertainment tax also needs to be rationalised. We need GST (Goods and Services Tax) to be implemented,” he says.
Foreign media companies will be in no hurry to stitch deals in the carriage space just because they have the option of taking full ownership.
“Everybody will have to wait for the third phase of DAS to get over,” adds Parameswaran. “Global media companies will not come to India to own analogue cable TV assets. But I don’t see AGR and taxes as a major stumbling block for stoking deals between carriers.”
There are more fundamental issues that cable companies need to address. Profitability in the cable TV business, rising ARPU, a larger broadband slice and control of the last mile are crucial features that MSOs need to have. Implementing DAS in Phases III and IV and harvesting revenues from the first two phases are also going to be important.
Even Comcast realises that the future ruler in a matured market would be the internet. Earlier this year, America’s largest cable company declared for the first time that it had more broadband than cable TV subscribers. Indian cable companies will have to ensure that they have a strong broadband play, a service that would enable them to increase customer bills and loyalty in the long run.
There is still a kind of psychological satisfaction in the thought that the broadcast carriage sector has opened up to full foreign ownership.
“The global majors don’t have to be constrained by the presence of a local equity partner. It is good to feel that they have the option to own 100 per cent and can run the company in whichever way they want,” said the head of a cable company, preferring anonymity.
So, will there be a change in strategy? Will global majors like Comcast and Liberty look at gobbling up smaller cable companies as an India entry strategy rather than picking up stake in the bigger national MSOs and growing with them? Will it all start with a regional MSO? Will the build-up phase to a pan-India footprint begin from there on? Will direct acquisition of a consortium of LCOs be another approach, looked at even by private equity firms?
For sure, this road to growth will be rough and challenging. There is too much fragmentation in the cable TV sector, investors would be uncomfortable scattering their investments in a long tail, and there are issues about the quality of network available for buying. The popular approach could still be eyeing stake in the top-tier MSOs.
According to Atria Convergence Technologies (ACT) group CEO Bala Malladi, the enabling provision of 100 per cent FDI will ensure that ‘we have unlimited funds for future expansion’. Incidentally, ACT is waiting for approval from the Foreign Investment Promotion Board (FIPB) to get private equity giant TA Associates invest $200 million for a 40 per cent stake in the company.
However, life for the broadband and cable TV player will not change. “We will continue to run our cable TV business through local partners. There is no plan to buy them out,” avers Malladi.
While the broadband business is wholly owned by ACT, the cable TV operations are run through three downstream subsidiaries. In Bengaluru, the cable TV operations are run through Kable First India, where ACT has 74 per cent stake and the balance 26 per cent rests with the local promoters. A similar structure prevails in ACT Digital, which operates in Andhra Pradesh. In ACT Cable TV, which operates in Nellore, the majority is with local promoters, while ACT has 49 per cent stake.
Ortel Communications president and CEO Bibhu Prasad Rath believes that the new FDI move is a ‘great enabling provision for improving the long-term investment climate in the sector’. He, however, admits that there will be no immediate impact on the regional MSO’s growth plans.
“We have raised capital through an initial public offering (IPO) and are now focused on building a larger customer base on a high quality last-mile network. Since we are already equity-funded for now, this change in FDI policy will not bring in any immediate tangible benefit for us,” he reveals.
MSOs will not want to dilute fully now. They would rather digitise and scale up to build higher valuations before they unload stake.
“Foreign funding will not come overnight. But there is a positive sentiment even as there is a need for capital. There is a huge segment to be tapped, both on the video and on the data side. For many MSOs, broadband is a fresh piece. MSOs will not only have to digitise but also embrace technologies,” says Asianet Satellite Communications president and chief operating officer G Sankaranarayana.
For the DTH companies, the game will not play out in any different way. Despite 74 per cent FDI, no foreign company has picked up a majority stake in an Indian DTH company.
Will 100 per cent FDI spur deals in the DTH sector? There is only Reliance Digital TV that is probably looking to exit. Dish TV and Videocon d2h are listed companies while Tata Sky has Rupert Murdoch-controlled 21st Century Fox as a 30 per cent equity partner. In Kalanithi Maran-promoted Sun Direct, Malaysia’s Astro has a 20 per cent stake.
“Reliance Digital TV has the least number of subscribers and was in merger talks with Sun Direct. Will a buyer be more positive now? There are no strong signals yet,” says a media analyst.
Sun Direct is turning out to be a regional DTH operator in the South and there are no indications that Maran is looking to dilute additional stake in the company. SCV, Maran’s cable TV outfit, has lost its firepower in Tamil Nadu even as state-owned Tamilnadu Arasu Cable TV Corporation has spread its net. For Maran, Sun Direct thus carries strategic value at this stage.
Airtel Digital TV was earlier in discussions with private equity firms, but now the talks have been shelved. Later, Airtel may look at roping in an investor or even go for an IPO.
“For distribution platforms like cable, DTH and HITS, the government has set the investment climate right by allowing 100 per cent FDI. The industry sees this as a long-term gain. In the interim, it is important to get digitisation right and fix the fundamentals of the business,” concludes Malladi.