Zee Entertainment (Zee) has announced that it is acquiring the TV portfolio of Reliance Broadcast (RBNL) for a consideration of Rs 2.98 billion. As part of the transaction, Zee will get two channels, Big Magic (comedy) and Big Ganga (Bhojpuri GEC), with combined FY’16 revenue of Rs 490 million, along with four TV licences. Zee is also expected to get tax benefits of close to Rs 2.8 billion as a result of the acquisition, which would almost nullify the acquisition price. The transaction is expected to be completed by H2CY17. Zee intends to fund the purchase through issuance of Rs 39 million of preference shares, while the balance will be the RBNL debt being taken on to its books. In a related transaction, RBNL is selling 49% of its radio business (45 operational radio licences and 14 new radio licences) to Zee Media (separate from Zee Entertainment) at a firm EV value of Rs 15.5 billion, with an option of acquiring the remaining 51% at a later date. The radio business will be spun off in an SPV, of which Zee Media (Annualised Net Debt/EBITDA at 6.1x as of Q2’17) will acquire a 49% stake.
TV channels a good strategic fit
We see the acquisition of the channels as a good strategic fit for Zee, as the Bhojpuri genre is a gap in Zee’s portfolio and, with Ganga, they are acquiring the leader in the space. Zee currently does not have a strong comedy presence. With Big Magic, they get a foothold into the space and should be able to improve viewership ratings. Although the channels are loss-making at the PAT level (exact numbers not disclosed), we do not see any significant dilution, as synergy benefits should be able to mitigate the impact. Given the relatively smaller size of the transaction, we believe it should have no impact on Zee’s redemption of its Redeemable Preference Shares (RPS). We maintain our Buy rating on Zee, with a PO of Rs 625.
We are positive on the stock as in our view the market is currently factoring in all the risks, but not reflecting the full benefits that should accrue out of content monetisation. We are positive on Zee as 1) We expect Zee’s ad revenues to be boosted by a pickup in the economy. 2) While we envisage delays in digitisation, we see the digitisation process as inevitable, and it should lead to better realisations because of the curtailment of underdeclaration of subs by local cable operators.
Zee Entertainment Enterprises is one of India’s largest vertically integrated media and entertainment companies. It is part of the Essel Group, and has interests primarily in Media, Entertainment and Education. Essel Group holds a 43% stake in the company.