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How the $385 mn Sony-Ten Sports deal is redrawing the TV broadcast map

MUMBAI: Agreeing to sell Ten Sports to Sony Pictures Networks for $385 million (about Rs 2,578 crore), Subhash Chandra-promoted Zee Entertainment Enterprises Ltd (ZEEL) has decided to exit from the sports business to focus on five growth engines.

ZEEL has signed a non-compete clause with Sony for four years, which implies that it can theoretically re-enter the sports market after taking a long holiday. Until that occasion of possible future return, it will invest in the five verticals of broadcast, digital, films, live events and international business.

With ZEEL leaving the sports field vacant, Star India and Sony will now pull all their resources to acquire rights, fight for market share and make the ecosystem favourable for pay TV income. Consolidation and a two-player market will put pressure on distribution platforms like cable TV and direct-to-home (DTH) to increase their payouts to the two sports broadcasters.

punit and np singh

National multi-system operators (MSOs), who have made use of digital addressable system (DAS) to consolidate their market share, will have the muscle power to control content cost. However, independent and small-sized MSOs will have to struggle against wild inflationary pressures on content. This will further fuel consolidation in the cable TV sector.

The DTH sector is making its first moves towards consolidation. Essel Group-owned Dish TV and Videocon d2h are in talks to merge, creating a mammoth subscriber base of over 27 million. It remains to be seen if the deal consummates and Dish TV is able to acquire Videocon d2h in a stock and cash deal.

The TV broadcast map is being redrawn. ZEE is moving to a model like Mukesh Ambani’s TV18 Broadcast. Sans sports, the two giants have a wide swathe of entertainment and news channels. They also have movie production, OTT and live events in their footprint.

Star India, a wholly owned subsidiary of Rupert Murdoch-controlled 21st Century Fox, and Sony Pictures Networks India (SPNI) will be similarly positioned, with presence in both sports and non-sports broadcasting. SPNI will, however, have to enter regional-language broadcasting to enjoy a larger footprint like Star does in India.

Till such time ZEE said goodbye to sports broadcasting, Chandra’s media empire resembled that of Murdoch’s. In yesteryears, the two towering personalities fought for TV audience share in sports, Hindi and regional-language markets, while in terms of distribution they competed for DTH and cable TV subscribers. Star retrenched from cable TV business in 2012 when it sold its stake in Hathway Cable & Datacom to focus on Tata Sky, the DTH joint venture company with Tata Group as a majority partner.

Deal Factsheet

  • Non-compete period of 4 years

  • All-cash deal. Sony to make payment at one go after closure of deal

  • Transaction and tax costs in the range of 5–10%

  • Deal likely to close in next 4–5 months

  • Some sports contracts require no objection certificates from respective boards. ZEE will need that. Transfer of rights not to be a problem due to Sony’s global credibility

  • ZEEL to use cash to invest in 5 verticals. It will seek board’s approval for early redemption of preference shares as a possible route to return excess cash to shareholders

  • Not to buy RBNL as radio biz allows FDI of 49%

  • Deal value does not include proceeds from two ongoing court cases with BCCI. If decision is in favour of ZEE, the benefit will go to the company and not move to Sony. ZEE could gain Rs 50 crore (including interest) from BCCI and another Rs 124 crore (excluding interest)

  • Ten Sports’ contribution to ZEEL’s total subscription revenue is in mid-teens.

Closing down loss-making channels is not new to ZEEL, though many doubted the company would ever let go of the sports business, which is viewed by many as a deep asset with strategic value. Last year, ZEEL pulled the shutters on 9X and Zee Premier while Zee Trendz and ETC Punjabi stopped airing in 2014. Zee Gujarati and Zee Next shut shop in 2009.

With money cascading into BCCI properties including India cricket and the Indian Premier League (IPL), Chandra and son Punit Goenka, who is the managing director of ZEEL, felt that exiting at a ‘fair value’ would be a good proposition. By then, Sony was looking at increasing its investments in the sports business and hedging risks against the possible loss of the IPL.

punit-and-np-singh-01Said Goenka, “This is a landmark deal for ZEE and a step towards a strategic portfolio shuffle as we grow our general entertainment business both in the domestic and overseas markets. While we have grown our sports business over the last 10 years through acquisition of content at competitive prices, our focus now is on transforming ourselves into an all-round media and content company, comprising five verticals, viz. broadcast, digital, films, live events and international business.”

Flushed with new capital of $385 million (TelevisionPost.com was the first to report that the Sony–Ten Sports deal size would be Rs 2,500 crore), ZEEL will set out to expand in regional markets, ramp up investments in digital and look for growth opportunities overseas, including acquisitions. There will be more channel launches and entry into the Malayalam market would be firmed up.

ZEEL has ruled out entering FM radio business through the buyout of Anil Ambani-led Reliance Broadcast Network (RBN), the company which houses radio stations under the Big FM brand and television channels Big Magic and Big Ganga. As per regulation, private radio companies cannot have more than 49% foreign direct investment (FDI). FM radio firms that have won frequencies under Phase III also cannot unload more than 49% stake till 2018.

With sports losses behind, Goenka believes that there are tremendous opportunities to grow rapidly as a media and content company. Media analysts have already started upgrading earnings and the stock closed Wednesday up 1.97% to Rs 539.65 per share on the BSE. With the right focus and expansion drive, ZEEL’s market capitalisation, standing at Rs 51,830.62 crore (Rs 518.31 billion), could accelerate in these four years.

“With ZEEL growing in size and profitability, the company can review its sports opportunities after four years,” a media analyst at a brokerage firm said.

Four years after the closure of the deal with Sony, ZEE would get a peep into the sports business again. By then, cable TV digitisation would have completed, subscription revenue would have hopefully matured and high-definition (HD) consumers grown. Non-cricket content would have also found more viewership and revenues.

Meanwhile, Sony gets an opportunity to build a formidable sports and entertainment TV network. The Ten Sports channels being acquired include TEN 1, TEN 1 HD, TEN 2, TEN 3, TEN Golf HD, TEN Cricket, TEN Sports that operate in several countries including the Indian subcontinent, Maldives, Singapore, Hong Kong, Middle East and Caribbean.

Sony will most likely retain the Ten sports brand, much the way Zee had done even after acquiring the network from Dubai-based Abdul Rahman Bukhatir’s Taj Group. It will, thus, work with three brands—Six, Sony ESPN and Ten Sports.

If Sony manages to secure the new cycle of IPL rights, it will evenly contest against Star India in a two-player sports television market. Star India, has broadcast rights to the cricket boards of India, England and Australia. It also has rights to telecast ICC matches, including the World Cups. In football, the sportscaster has retained the English Premier League (EPL) while Pro Kabaddi League (PKL) is a growing property.

The load of the IPL in a new contract and the acquisition of Ten Sports will make SPNI’s structure heavy on sports investments. SPNI CEO NP Singh will have to take a call on how the balancing structure between the sports and entertainment units play out.

With Ten Sports being in Sony’s pocket, Star may make an all-out bid to snatch away the IPL rights. The IPL rights fee could climb to stratospheric heights. With the new wings developed in Sony’s sports broadcasting ambitions, a grim tussle is on the cards between the two players.

It all boils down to spending big to be in the top two. There is possibility that Sony may arm itself with the IPL at a steep cost and attempt to spread out its tentacles into regional-language broadcasting on the back of a sports empire. In case flagship Hindi general entertainment channel (GEC) Sony Entertainment Television turns around, Singh will be firing on all cylinders. Zee has just given Sony that little bit of space to bet big and grow on all fronts to the top tier. If Sony succeeds, this will make Zee uneasy.

There is another possibility. The Ten Sports deal can act as a cushion for Sony to continue with its sports business without the IPL if the cost to own cricket’s highest revenue-earning property is too pricey. In a consolidated market, Sony will have WWE, cricket content from the five boards of South Africa, Sri Lanka, Pakistan, Zimbabwe and the West Indies, along with other properties. Without the IPL and with Ten Sports, SPNI’s sports business will have a large reach but Star India will be ahead by a distance. It remains to be seen which path Singh chooses.

The game is on between Star and Sony. Before sports rights fees of prime properties like the IPL start ageing, the Big Two in the new era of sports broadcasting will have to fight it out before they decide on their turfs.

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