RIL, that had quietly picked a large stake in the Eenadu Group and had it kept that under wraps till now, will indirectly fund this acquisition by bankrolling the promoter group firms through equity convertible debt. In the future this will give it a significant equity stake in Network18 Group, and thereby a large exposure to bustling media sector in India.
Both Network18 and TV18 scrip shot up almost 20 per cent each to hit their respective upper circuit limits for the day on Tuesday. Although, the deal would not immediately call for an open offer for the listed firms, when RIL chooses to convert the debt into equity in the future, it may end up triggering a mandatory open offer.
Either ways, this will give RIL a huge exposure in the media business spanning areas such as television, Internet, filmed entertainment, e-commerce, magazines, mobile content and allied businesses including prime properties such as CNBC-TV18, CNN-IBN, MTV, Colors and moneycontrol.com among others. It will also strengthen the group's new media business with a solid content base for the launch of broadband business housed under Infotel.
Ernst & Young acted as advisors for financial and tax due diligence and valuation of the assets. The legal due diligence was carried out by Khaitan & Co.
Network18-RIL Deal:
Under the agreement, the board of directors of TV18 Broadcast Limited (TV18) on Tuesday approved the acquisition of 100 per cent stake in regional news channels in Hindi namely ETV Uttar Pradesh, ETV Madhya Pradesh, ETV Rajasthan and ETV Bihar and ETV Urdu channel besides 50 per cent stake in general entertainment channels ETV Marathi, ETV Kannada, ETV Bangla, ETV Gujarati and ETV Oriya and 24.50 per cent in ETV Telugu and ETV Telugu News.
TV18 will have board and management control of ETV News Channels and ETV non Telugu entertainment channels. The Board has approved an outlay of up to Rs 2,100 crore for this acquisition.
Additionally, TV18 has an option to buy the balance 50 per cent interest in ETV non Telugu GEC Channels and additional 24.50 per cent interest of ETV Telugu Channels, currently held by RIL Group.
To fund the acquisition, both Network 18 and TV18 in separate board meetings today approved rights issue to the tune of upto Rs 2,700 crore each. Network18, being the promoter and holder of majority equity in TV18, would be subscribing to about Rs 1,400 crore in the rights issue of TV18 – therefore, once this subscription amount is netted out, the net aggregate rights issue of both Network18 and TV18 will result in a fund raising of about Rs 4,000 crore.
The contribution of the current promoter entities of Network18 in these twin issues will be about Rs 1,700 crore. Besides subscribing to their full portion, the promoters of Network18 will also reserve the right to subscribe to any unsubscribed public portion of the rights issues.
It is here that RIL would come in to indirectly fund the transaction. Raghav Bahl, the promoter of Network18 and TV18, has disclosed that promoter companies have entered into an arrangement with Independent Media Trust, a trust set up for the benefit of RIL, to secure the funding required for this purpose.
Bulk of the promoters contribution to the rights issue would come from an investment trust of RIL that will subscribe to optionally convertible debentures of the promoter entities of the Network18 Group.
So even as RIL will have rights to pick a major stake in Network18 group firms in the future, Raghav Bahl as founder and promoter, shall continue to retain management and 51 per cent control over Network18 and 51 per cent control over TV18 through Network18 in the near future.
TV18 will utilise the money to repay the existing debt, fund the acquisition of ETV Channels and fund working capital needs. Network18 will utilise the funds raised to repay the existing debt and subscribe to the rights issue of TV18.
In a statement Bahl, founder, editor & managing director of Network18, said: "By inducting such a significant amount of equity, our balance sheets will become among the strongest in the industry."
RIL's Eenadu Investments:
RIL, through investments of about Rs 2600 crore, by its group companies, currently holds interest in various ETV Channels being operated and managed by Eenadu Group including 100 per cent economic interest in the regional news channels, 100 per cent economic interest in ETV non Telugu entertainment channels besides 49 per cent economic interest in ETV Telugu Channels.
It is not clear exactly when RIL made these investments.
Earlier, Blackstone had struck a deal almost five years ago to acquire a large stake in Eenadu's Hyderabad-based parent firm Ushodaya Enterprises, but the deal had come unstuck as it faced political opposition from other media sector investors in Andhra Pradesh.
While Blackstone initially cut the size of the deal, it later completely pulled out of the transaction after facing delays in securing a green signal from government authorities to complete the transaction.
Thereafter, Nimesh Kampani of JM Financial Group had reportedly acquired a stake in Eenadu. Given the latest announcements, RIL would have later acquired the economic interest in the media group from Kampani.
Incidentally, younger brother Anil Ambani has a large presence in the media business and as per the now defunct non-compete agreement, the two brothers were not allowed to invest in sectors in which the either brother has a business presence. This non compete-clause was scrapped in May 2010 so the investments in Eenadu could have potentially happened thereafter.
Notably, Blackstone's India chief Akhil Gupta was previously with Reliance Group and was a senior member of the team handling the group's telecom venture(before the group was spliced up between the two Ambani brothers).
What Does It Mean For Network18 Group:
By acquiring this strategic control over several ETV Channels, TV18 will have a bouquet of leading television channels.
ETV is one of the leading TV Networks in South India and it is also among the top five broadcast networks in the country. ETV Channels were one of the first entrants in the regional markets and have a considerable viewership base.
On a combined basis, TV18 will be offering a mix of national and regional channels catering to diverse genres like Hindi and regional entertainment; general news in English, Hindi and regional languages; business news in Hindi, English and regional languages; music; kids; devotional and infotainment channels.
Including the soon-to-be-launched services/variants, this combined bouquet of over 25 channels will make Network18 a formidable player in the media & entertainment business.
RIL Biz Diversifications:
For India's most valued company the latest transaction comes as yet another business diversification from its core energy business. The firm that earlier ventured into retail sector and over the past two years has gone pretty aggressive with entry into hospitality(strategic interest in Oberoi Hotels promoter EIH Ltd), financial services(JV with DE Shaw) and broadband (acquired 95 per cent in Infotel for Rs 4,201 crore).
Even as oil & gas sector remains at the core of the company (and its cash cow in the near future), with the latest business diversifications RIL is slowly transforming itself into a conglomerate with diverse businesses.
Besides marking a big bang entry into the media business, the latest deal also brings synergies for RIL's foray into new media sector.
Infotel Broad Band Services Limited (Infotel), a subsidiary of RIL, has also entered into a Memorandum of Understanding with TV18 and Network18 for preferential access to all their content for distribution through the 4G broadband network being set up by Infotel. As per the MoU, Infotel will have preferential access to the content of all the media and web properties of Network 18 and its associates and programming and digital content of all the broadcasting channels of TV18 and its associates on a first right basis as a most preferred customer.
RIL expects digital content from entertainment, news, sports, music, weather, education and other genres will be a key driver to increase consumption of broadband.
Raghav Bahl-led of Network18 Group is acquiring a string of regional language news besides general entertainment TV channels under Eenadu Group owned by Reliance Industries Ltd(RIL) for upto Rs 2,100 crore($395 million), the company said on Tuesday.
After a tumultuous 2011, the natural question to ask is what augurs for 2012! With that objective in mind, I summarise below two interesting viewpoints – from Bill Gross who runs the world's largest bond manager Pimco and from Robert Prince who is the co-CIO of the world's largest (and incredibly successful) hedge fund Bridgewater (which was up 25% until end-November versus -3.7% for the average macro hedge fund). Both present thought provoking outlooks which are worth giving serious consideration to:
Bill Gross:
-We are entering 2012 in a "paranormal" environment created by "zero-bound" interest rates which have created two possible "fat tailed" outcomes – either a central bank driven inflationary expansion or an "implosion" driven by delevering.
-A zero-bound interest rate environment , where rates are held at or close to zero for a significant time, creates no incentives to expand credit as flat yield curves provide limited opportunities for earning "carry" or capital gains.
- In addition, money market fund business models break-down as operating expenses exceed income leading to shifting of deposits to banks who then deposit them with the Fed in the form of reserves.
-The Fed, in its late January meeting, is likely to announce that it will keep rates at 25 basis points for 3 years or more until inflation or unemployment reach specific targets. This is QE by another name, and if it doesn't work , then a more formal QE3 is likely by mid-year. This mirrors the ECB 3 year refinancing operation, to be used by banks to fund sovereign bonds, which is a thinly disguised form of QE as well.
-In this environment it would make sense for investors to hedge their bets until the outcome becomes more clear:
-Maximise duration/average maturities as negative yields will continue with central banks holding rates at zero for a while.
-Hold US sovereign bonds in the 5-9 sector, which protect against inflation and benefit from the "roll-down" effect. Avoid European government bonds.
-Keep long term TIPS bonds to protect against inflation.
-AA and A rated credits and senior (rather than subordinated) bank paper.
-High yield stocks in sectors with relatively stable cash-flows - electric utilities, big pharma and multinationals.
-Commodities are tilted to the upside given the scarcity and geopolitical risks. Gold likely to go higher if QEs continue.
-The dollar could go either way – go up in a delevering scenario or debase in a reflationary scenario.
-Lower expectations to 2-5% long-term returns for stocks, bonds and commodities.
Robert Prince:
-The US and European economies are like "zombies" and are likely to remain like that (slow growth and high unemployment) until they reduce their debt burdens. Interest rates in the US and Europe will be locked at zero for a long time.
-Stocks will be vulnerable to "air pockets" from shocks – particularly from Europe. However, investors looking at the decade ahead could find equities to be attractive.
-Treasuries still have upside, despite low rates, and gold and Asian currencies are likely to do well as central banks continue to print money.
-The US economy is unlikely to sustain its recent better-than-expected performance as its driven by a decline in the savings rate, without material gains in personal income and employment. In addition, long-term credit growth remains weak.
-The leveraging-up period went on for 60 years- from the early 1950s to 2008 and was self-reinforcing on the way up – and with the bursting of the debt bubble the process is now self-reinforcing on the way down.
-The delevering process has hardly started with household debt to net worth being still higher than it was before 2008. Against this backdrop, the Fed will continue to buy government bonds (albeit on a sporadic basis).
Thought provoking views, highlighting the importance of keeping the macro delevering picture in mind when making investment decisions. I think this further reinforces the importance of diversity and constructing a portfolio which has something "for all seasons". A portfolio we have discussed for a while - comprising US and global energy, US and global high quality multinationals, high grade corporate and US mortgage and treasury bonds, EM (China, India and select others) stocks, select EM (saving surplus countries) currencies and bonds, gold and cash should be able to withstand the shocks while providing reasonable (5-7%) returns over a 3-5 year period. The case for having substantial exposure to emerging markets becomes even stronger with the above views (despite the underperformance in 2011) given their significantly superior debt, demographic and growth profiles when compared to the developed world. US treasury and mortgage bonds and cash will provide insurance against the frequent "air pockets" ahead of us, with corporate bonds and stock yields providing the income flows.
Regarding the global economic outlook for the year, it is clear (as Gavyn Davies points out in the FT) that the leading indicators (see graph below) point towards an improving global economy since the low point reached in the summer of 2011. It is also remarkable to note that stock markets followed the path of the leading economic indicators (which lead the economy itself) quite closely! We can therefore expect a reasonable start to 2012 with a possible slowing down again by the summer (for the reasons outlined in the two views above). The key risk remains contagion via stresses in the eurozone banking system (as pointed out by Gavyn Davies) as illustrated by Bloomberg's financial conditions indicator (see second graph below) which shows a marked deterioration in Europe (to about half the 2008 levels) – which could have been worse if it were not for the ECB's unprecedented quantitative easing via their 3 year refinancing programme. In contrast, please note the Fed's success in keeping financial conditions easy in the US.
All The World's Gold
GDP growth to slow; downgrades likely We expect FY13 GDP to slow to 6.8% and consensus to cut GDP forecasts over the next few months. GDP growth in the next few quarters is likely to come even lower at around 6.5%. A slower GDP will be led by: (a) a slowing global economy, (b) impact of high rates and (c) slowing investment spend.
Earnings downgrades to continue
We continue to expect earnings downgrades, led by slowing sales and sustained margin pressure from rising labor and interest costs. We expect the bottom-up Sensex EPS of Rs1,275 to be downgraded to Rs1,200 (growth of under 10% vs.expectations of nearly 15%).
Consequently……We expect the Indian equities to head lower in 1H2012 led by the falling growth, worsening domestic macro fundamentals, deteriorating earning profile, slowing global economy and elevated risk of more adverse outcome from Europe. We also expect the market to get slightly de-rated, given the Indian equity valuations are still at premium to peers.
…would provide better trading opportunities
Nonetheless, we see the likely fall in equity prices as a 'big' trading opportunity. The current cycle is proving to be quite similar to 1990's where markets remained in a broad trading range during 1994-1999. The long term (5yr) Sensex returns chart suggests that 2012 may see market record the bottom of the cycle. Though, a new secular bull market does not appear to be in sight as yet.
The upside to be driven by rate cuts and policy initiatives
We see tough times for markets near term and believe that market could recover in later part of the year, to end 2012 with a positive return. The recovery would be triggered by the RBI easing the policy stance, cutting rates and Government taking policy decisions to kick-start investment spend. In our view, RBI should start easing from March and lending rates may fall by 150bps during April-September period.
Strategy: gingerly buy the dips below15K, sell above 18K
Given our view that on top down basis Sensex may fall to 14500 level in 1H2012 and see a recovery to 19K level by the year end, we suggest buying the dips below 15K and selling above 18K levels. As we expect rate cuts to be a key theme for the market in 2012, we suggest rate sensitives for trading. However, we would prefer to play rate sensitives through consumer discretionary, i.e., passenger auto, and defensive large private sector banks rather than infrastructure and real estate.
We continue to expect earnings downgrades, led by slowing sales and sustained margin pressure from rising labor and interest costs. We expect the bottom-up Sensex EPS of Rs1,275 to be downgraded to Rs1,200 (growth of under 10% vs.expectations of nearly 15%).
Consequently……We expect the Indian equities to head lower in 1H2012 led by the falling growth, worsening domestic macro fundamentals, deteriorating earning profile, slowing global economy and elevated risk of more adverse outcome from Europe. We also expect the market to get slightly de-rated, given the Indian equity valuations are still at premium to peers.
…would provide better trading opportunities
Nonetheless, we see the likely fall in equity prices as a 'big' trading opportunity. The current cycle is proving to be quite similar to 1990's where markets remained in a broad trading range during 1994-1999. The long term (5yr) Sensex returns chart suggests that 2012 may see market record the bottom of the cycle. Though, a new secular bull market does not appear to be in sight as yet.
The upside to be driven by rate cuts and policy initiatives
We see tough times for markets near term and believe that market could recover in later part of the year, to end 2012 with a positive return. The recovery would be triggered by the RBI easing the policy stance, cutting rates and Government taking policy decisions to kick-start investment spend. In our view, RBI should start easing from March and lending rates may fall by 150bps during April-September period.
Strategy: gingerly buy the dips below15K, sell above 18K
Given our view that on top down basis Sensex may fall to 14500 level in 1H2012 and see a recovery to 19K level by the year end, we suggest buying the dips below 15K and selling above 18K levels. As we expect rate cuts to be a key theme for the market in 2012, we suggest rate sensitives for trading. However, we would prefer to play rate sensitives through consumer discretionary, i.e., passenger auto, and defensive large private sector banks rather than infrastructure and real estate.
China said Wednesday it opposed "unilateral" sanctions against Iran, after US President Barack Obama signed into law new measures targeting the Islamic republic's central bank.
Washington's move came after the United States, Britain and Canada said in November they were slapping additional sanctions on Iran, citing evidence that Tehran is pursuing nuclear weapons.
Tehran denies the allegations, saying its nuclear programme is exclusively for medical and power generation purposes, and China has repeatedly said sanctions will not resolve the issue.
"China opposes placing one's domestic law above international law and imposing unilateral sanctions against other countries," said foreign ministry spokesman Hong Lei in response to a question about US sanctions on Iran.
China and Iran have become major economic partners in recent years, partly due to the withdrawal of Western companies in line with sanctions against Tehran.
China and Russia — key allies of Iran — have often sought to take a softer stance on the Islamic republic than their fellow members of the UN Security Council.
This would stop Iran from selling 450,000 barrels to Europe every day, potentially depriving the country of 30 per cent of its oil exports. Even if Iran found alternative buyers, it would probably have to cut the price of its crude, thereby losing billions of dollars.
This possible threat to its principal source of revenue has already drawn a belligerent response from Iran, which has warned that it would respond by blocking the Strait of Hormuz, the most important link in the global oil supply chain.
On Tuesday Iran criticised the US for sending an aircraft carrier, the USS John C. Stennis, through the Strait and cautioned America not to repeat this move.
"We recommend to the American warship that passed through the Strait of Hormuz and went to Gulf of Oman not to return," said General Ataollah Salehi, commander of Iran's regular armed forces.
Last month, EU foreign ministers failed to agree an oil embargo, largely because of objections from Greece, Italy and Spain, who together buy most of Iran's crude exports to Europe.
But Alain Juppe, the French foreign minister, signalled a renewed drive to secure a ban.
"Iran is pursuing the development of its nuclear arms, I have no doubt about it," Mr Juppe told French television, adding that France had responded with a unilateral decision not to buy Iranian oil. "We want the Europeans to take a similar step by January 30 to show our determination," said Mr Juppe.
Any such embargo would amount to "biting sanctions in the real sense of the word," said Mark Fitzpatrick, a director at the International Institute for Strategic Studies. But Iran's threat to retaliate by closing the Strait of Hormuz was "bluster", he added.
"That would invite a military attack and prevent Iran's own oil from going through the Strait," said Mr Fitzpatrick.
Other observers take a different view of Iran's threats. Nigel Kushner, chief executive of Whale Rock, a legal practice specialising in international trade and sanctions, said that Iran's warning to close the Strait of Hormuz should be taken seriously.
"The Iranians would find it difficult not to take quite drastic action if the EU does ban their oil imports," he said.
The Tehran regime, riven by factionalism and infighting, has found it impossible to agree a coherent response to its increasing isolation.
"Everyone is underestimating the internal political differences in Iran today," said Mr Kushner. These divisions, he added, made it more likely the regime would retaliate for any EU embargo.
America has closed the books on 2011 with debt at an all time
record $15,222,940,045,451.09. And, as was observed here first in all of the press, US debt to GDP is now officially over 100%, or 100.3% to be specific, a fact which the US government decided to delay exposing until the very end of the calendar year. We wonder, rhetorically, just how prominent of a talking point this historic event will be in any upcoming GOP primary debates. And yes, technically this number is greater than the debt ceiling but it excludes various accounting gimmicks. When accounting for those, the US has a debt ceiling buffer of… $14 billion, or one third the size of a typical bond auction.
