32%! THAT IS HOW MUCH THE SHARES OF ZEE Entertainment Enterprises Ltd (ZEEL) zoomed Wednesday after the Indian media major announced a merger with Sony Pictures Networks India (SPNI). On the Bombay Stock Exchange (BSE), the ZEEL stock jumped to its 52-week high of Rs 337.10.
The rise in ZEEL’s stock value is an apt allegory on how much the ball has now swung towards the court of the Indian subsidiary of Sony Pictures Entertainment as far as its chances of regaining the rights it held for the Indian Premier League, which it had held for ten years from the IPL’s inception in 2008, come up for bidding.
Why so? We’ll come to that. First, getting up to speed on the proposed merger is required.
Points to note
1. SPNI would hold a majority 52.93 per cent stake in the combined company, ZEEL shareholders would hold the balance 47.07 per cent.
2. The non-binding Term Sheet provides an exclusive negotiation period of 90 days during which ZEEL and SPNI will conduct mutual diligence and negotiate definitive, binding agreements.
3. Merger will need approval from 75% of Zee shareholders.
4. The merged entity will still be a listed company in India.
5. Current ZEEL managing director & CEO Punit Goenka will continue in the position for another five years
6. Combined company’s board of directors would include directors nominated by Sony Group, which will having the right to nominate the majority of board members.
7.Under the terms of the agreement, Sony Pictures Entertainment, the parent company of SPNI, would invest growth capital so that SPNI has a cash balance of around $1.575 billion (Rs 11,600cr) at closing for use to enhance the combined company’s digital platforms across technology and content, ability to bid for broadcasting rights in the fast-growing sports landscape (emphasis ours) and pursue other growth opportunities.
Poll of three analysts’ first cut views on combined company post merger:
Sales potential: Rs 12,500-15,000cr
Profit Potential: Rs 1800-2000cr
Cash on books: Rs 12,000cr
Combined market cap as on date: Rs 50,000cr
With respect to the above “first cut views”, it bears noting that for the year-ending March 2020, Star India had reported revenues of Rs 14,337.46cr, while ZEEL reported consolidated revenue from operations of Rs 8,129.86cr, and SPNI reported a top line of Rs 5,961.10cr.
With reference to point 3 (merger will need approval from 75% of Zee shareholders), what forced the hand of the promoter family (read Subhash Chandra and his two sons, Punit and Amit Goenka) is the call given by Invesco, through Invesco Developing Market Fund and OFI Global China Fund Llc, demanding an extraordinary general meeting (EGM) seeking a shareholder vote on the removal of Punit Goenka, two other independent directors, and appointing six new independent directors.
Invesco and OFI, which own a combined 17.88% in ZEEL, being on date the largest shareholders in the company, is expected to support the merger. According to proxy advisor firm InGovern, with “White Knight” Sony as a majority shareholder, and a likely reconstituted board, the merged entity is exactly what Invesco would have hoped for.
Having set up the preamble as it were, we can turn our attention to the tender process for allocating the next five-year cycle of the cash-rich Indian Premier League’s (IPL’s) global broadcasting rights, which the Board of Control for Cricket in India (BCCI) is expected to declare open in December-January, pretty much any time after the ICC Men’s T20 World Cup is done and dusted.
Before going into the reasons as to why SportzPower is bullish on SPNI regaining the IPL rights it lost to then Star India (now Disney), rewind to September 2017. Star India won the worldwide television and digital media rights to the biggest annual property in cricket with a consolidated bid of Rs 16,347.5 crore for the five-year period from 2018 to 2022.
Star India’s bid commitment was made calculating 300 games over five years, which was what an eight-team IPL entailed. Under that scenario, the per IPL game payout that Star has to make to the BCCI for the current cycle of media rights is (Rs 54.5cr per game).
From the next cycle however, the IPL will be a ten-team proposition with 94 games per season, or 470 games in total, as compared to the 300 games that Star had made its bidding around in 2017.
Keeping this in mind, if there is zero increase in the Rs 54.5cr per game media rights value of the IPL, Rs 25,615cr would be the payout commitment for any potential bidder.
For a potential consolidated worldwide television and digital media rights bid to hit Rs 30,000cr (a figure that is currently doing the rounds), it would mean that there is a 17% increase over the current per game value to Rs 63.8cr. Too outrageous? Not really if one keeps in mind that on a per-match basis, Star will actually be paying far, far more (Rs 77cr) for its BCCI rights for the upcoming 2021-2022 season and the next, than it does for the IPL (Rs 54.5cr).
So if Rs 30,000cr is the ball park around which the next cycle of IPL rights bidding will go for, the immediate contenders are the usual suspects Sony and Disney. And the elephant in the room (figuratively and actually) – and the combined strength of Reliance Industries Ltd’s Jio Telecom and the RIL controlled Viacom18.
So are the “odds” less on Disney? It will put in a strong bid for sure but the BIG difference from last time round is that unlike the carte blanch given to then Star India boss Uday Shankar by the Murdochs to go all-in, present Disney India head K Madhavan has no such luxury. It is worth noting that at the time, Shankar was also tasked with increasing the valuation of Star India at a time when the sale process for parent 21st Century Fox was well in play. It was Star India’s tent pole cricket properties – IPL, BCCI and ICC rights – that also contributed to the $16.5 billion valuation that India’s largest media network accounted for in the $71.3 billion sale of the film and TV assets held by 21st Century Fox to The House of Mouse.
And RIL? It certainly can. But will it? RIL’s most significant investment in sport till date has been the Hero Indian Super League football tournament. And on the broadcast front as well, it has mostly been about football, the most high profile of which being the $55 million (Rs 406cr) that it put down recently to acquire the South Asia rights to the 2022 FIFA World Cup Qatar.
Jio is already India’s top telecom player so is big cricket acquisitions critical to retain market leadership? SportzPower believes not. As for the plans for Viacom18, the possibility is there. The SportzPower has yet to be convinced on the probability about sums it up.
On to SPNI. The BIG leg-up before even getting off the starting blocks as it were is the $1.575 billion (Rs 11,600cr) that SPE has announced it has parked for “use to enhance the combined company’s digital platforms across technology and content, ability to bid for broadcasting rights in the fast-growing sports landscape and pursue other growth opportunities” as a part of its merger agreement with ZEEL.
The operative part of the statement for SPNI as far as the IPL is concerned is the “ability to bid for broadcasting rights in the fast-growing sports landscape”. Seen from this perch, this “war chest” gives it a big advantage over potential rivals in making its bid price calculations.
And what if the P&Ls do not balance? Refer back to point 4. The merged entity will still be a listed company in India. As was the case for Star India and the 21st Century Fox sale to Disney, it will help valuations and share price.
The ZEEL share price got a 32% bump up on the merger announcement. An announcement that the IPL rights were “back in its original home” would certainly help SPNI-ZEEL’s stock market play.
Considered analyses remain just that though. Considered. The winning bid might well come “out of left field”. Interesting times ahead, whichever way the dice falls!
