[Editorial Notes : Reliance acquired Network 18 for INR 4,000 crores. There is definitely more to the deal than what meets the eyes. Read this guest piece by Deepak Shenoy.]
The buzz in the media industry is that Reliance Industries (RIL) has decided to buy Network18. What fantastic news, you think, until you understand that Reliance Industries:
- already quasi-owned a substantial chunk of Network18
- and are asking remaining shareholders to sell their shares at less than current market price
Wait a second. There’s got to be juicy stuff here, right?
(Warning: My answer involves conjecture. You’re likely to be disappointed)
But first, the boring but required history
To Keep Things Short
- Reliance owned a good chunk of the Eenadu channels, it seems.
- TV18 wanted to buy Eenadu, we don’t really know why.
- TV18 runs the CNBC TV18, CNBC Awaaz and the CNN-IBN set of TV Channels
- They didn’t have the money either. They planned to raise it from their investors.
- So Reliance decided to help. Not buy giving TV18 money – that would be too obvious.
- They gave the promoters of TV18’s effective owner, Network18 – money through optionally convertible debentures. These would convert to 99.9% ownership of those companies, meaning Reliance would effectively control Network18 and TV18 if they wanted. (Source: Competition Commission PDF)
- After all this, TV18 would get money, use some of it to retire debt and the rest to buy the Eenadu stake from RIL.
- This was a complex mechanism for RIL to pay itself but it was done anyhow.
- The rights issues for Network18 and TV18 were at Rs. 30 and Rs. 20 respectively, in 2012. They went through, and the Bahls – the promoters of Network18 – got themselves a juicy 70%+ ownership that was effectively RIL’s through their convertible debentures
- To avoid having to actually aggregate Network18 into their consolidated results, this whole thing was done through a trust, called the Independent Media Trust (IMT), whose sole beneficiary was RIL (and which was funded by RIL)
Fast Forward to Mar 29, 2014
RIL has officially bought out Raghav Bahl’s ownership. They’ve decided to fund IMT to actually buy the stake of the Network18 promoters, and eventually will own TV18 as well.
This triggers a lot of SEBI regulations, so they have to make open offers to:
- Network18 shareholders – where they now control 78% stake and have offered to buy the remaining for Rs. 41.04 per share
- TV18 shareholders – RIL now has control over 55% of the company and has offered Rs. 30.18 for another 26%.
- Infomedia – where RIL owns 48% now, and offers Rs. 3.92 per share for another 26%.
Lots of top management of Network18 have quit, and apparently RIL has been hiring media people to potentially replace them. Rajdeep Sardesai and Sagarika Ghose will quit, as has Raghav Bahl and many other top people in the company.
The Open Offers Won’t Work
Yes, we’re getting open offers. But they won’t work.
Because Network18’s price in the market is Rs. 45 today, and TV18 is at Rs. 34. Both at 10% above the offer price. Why would you sell to RIL for lower?
(Infomedia is trading below but it’s too small to be worth the discussion)
So they really don’t want to acquire the rest of the shares. They will if they have to, I guess, since that’s the offer; but if the market remains at this level, the offer won’t get much response.
- The companies remain listed
- Reliance spends nothing (it’s payment to Raghav Bahl was already made in 2012)
But Why Did They Bother?
So if RIL already quasi owned stake in the Network18, why did they formally acquire Network18 and TV18? It’s not evident, and they’re saying it’s some kind of deal about their 4G license. Which to be honest, seems like a load of bull because Reliance has simply not done anything with their 4G license so far and they already controlled the company anyway.
So the answer has to be something else. But what?
I don’t know much. No one tells me anything because I’m a relative nobody. So I’m going to make some guesses.
It’s about taking over Network18. Network18 has been losing money forever. And Reliance probably needs to change that, and will have to be in the driver’s seat.
It might be something in the new Companies Act, 2013. The act has some crazy requirements of companies that issue debentures, including those that convert to shares.
Bahl wanted out. You can only be a pawn that long.
(Something more sinister?)
The Management Trust Issue Continues To Be A Problem
If Network18 continues to be listed then it’s going to have to deal with the fact that there is an ESOP Trust called Network18 Senior Management Welfare Trust that owes it over 500 cr. This was given in the past to effectively buy Network18 shares in the market. Capital Mind has written about it extensively.
Given the structure of the deal, it might still not be required that RIL consolidate the results of Network18/TV18 with its own. Because in the middle lies a trust, the IMT. (I don’t know the law well enough though) This management trust issue is not something RIL wants on its hands, apart from the crazy web that Network18 has become over the years. (See Posts One, Two, Three)
I wish the employees of Network18 the very best. I hope they don’t get fired, but it seems like the people who would have fired them have been asked to leave.
And if you’re wondering if Network18 is a good buy at this price, I have a Suzlon to sell you.
[About the author : Deepak Shenoy is a founder at Capital Mind (capitalmind.in) which has free and premium content built around Indian Financial markets. He specializes in macro-economic data, market metrics and derivatives. Deepak lives in Bangalore with his wife and two boys, and tweets @deepakshenoy.
Reproduced from Deepak’s post]