Mukesh Ambani ensured his group’s entry into media sector had a big ticket tag attached to it when he unveiled a previously unannounced $500 million investment in regional media group Eenadu and simultaneously struck a deal that would give Reliance Industries a significant equity stake in one of the country’s biggest new media groups, Network18. While analysts still try to find out who gained and who lost in the multi-tiered transaction announced yesterday, one aspect of the deal has got less attention. The valuation of Eenadu and how does the decision of private equity major Blackstone, that pulled out of an announced deal to invest in the south Indian media group, look, of-course, on hindsight.
Here’s an attempt to piece together and then dissect the deals revolving around Eenadu.
The Blackstone Deal That Never Happened:
Let’s start with a flashback to January 2007. Blackstone announced what was one of the biggest PE deals in India and certainly the biggest involving the print media till then. It struck a deal to pick 26 per cent in Ushodaya Enterprises, the parent company of Eenadu, for around $275 million (around Rs 1,240 crore back then). This valued the parent company at around Rs 4,770 crore.
Ushodaya Enterprises clocked revenues of Rs 948 crore with EBITDA of Rs 196.15 crore and net profit of Rs 153.84 crore for the year ended March 2007, according to VCCEdge, the financial research platform of VCCircle. So, Blackstone valued the main group company around 24x EBITDA and 31x net profit.
Bulk of the company’s business comprised media even as the Ramoji Rao-led group is also into hospitality sector (Dolphin Hotels), entertainment infrastructure (Ramoji Film City theme park in Hyderabad), financial services (Margadarsi Chit Fund) as also FMCG (Priya Foods) and film distribution among other fields.
According to a rating agency report, Priya Foods is one of the divisions of Ushodaya Enterprises, but the other businesses are not housed under the flagship company.
The Blackstone deal got meshed into trouble from unexpected quarters, political opposition. Eenadu needed funds to retire debt and to strengthen its position. This was also the time when YS Jagan Mohan Reddy, son of former Andhra Pradesh chief minister YS Rajasekhara Reddy, was building his own presence in the regional media space in the state.
As a result, there was a political roadblock in giving a mandatory green signal to a foreign investment in an Indian media firm.
Before scrapping the deal altogether in early 2008, Blackstone pursued the investment for months. It even reduced the size of its original $275-million deal to around 14 per cent stake for Rs 590 crore, at a lower valuation. This deal would have valued Ushodaya at Rs 4,215 crore or around 12 per cent less than the original deal.
Notably, this was before the global economy went into a tailspin and the stock market valuations were ripped apart from the avalanche of sub-prime crisis in the West. Although there was no official statement from Blackstone as to why it pulled out, it was reportedly due to the twin reasons of apprehension over the original valuation due to new competitors in the field (Reddys) as also the fact that the PE firm didn’t want to run onto the wrong side of the political establishment. Either way, even as foreign investment promotion board (FIPB), the nodal body monitoring foreign investment in the country approved the deal, it was scrapped.
Nimesh Kampani’s Investment In Eenadu Group:
Within weeks of Blackstone pulling out of the deal Mumbai-based veteran of Indian investment banking Nimesh Kampani stepped in to invest in Ushodaya Enterprises, in his personal capacity. Kampani who sold his stake in institutional equity sales and research joint venture JM Morgan Stanley Securities to the foreign partner for over $440 million certainly had the money to digest a large transaction.
Details of the investment was not made public, but a rating agency report on Ushodaya shows Equator Trading Enterprises, a special purpose vehicle floated by Kampani picked 21 per cent in the firm for Rs 1,424 crore. This deal, apparently, valued the company at Rs 6,780 crore, or over 50 per cent more than what Blackstone was willing to accept.
This was arguably justified by the over 50 per cent jump in EBITDA of Ushodaya for the year ended March 2008 over the year ago period. The Kampani deal valued Ushodaya at 21x its EBITDA, marginally lower in terms of multiples than Blackstone’s original deal, but much higher and indeed pretty bold valuation at a time when the early signs of economic problems had started surfacing.
The first public report of Kampani’s investment came in early February 2008, or around 10 days after stock markets crashed globally.
Incidentally, in 2007 December-end, Blackstone's India chief Akhil Gupta was quoted in the media as saying: "I cannot let the deal go like that. I will fight for it." So the final contours of Kampani’s deal would have been inked only in January 2008.
Reliance & Network18’s Valuation For Eenadu:
Here’s where it gets tricky. The latest announcement by RIL-Network18 Group makes it clear, Ushodaya has been spliced into different businesses comprising regional news channels (non Telugu), general entertainment channels (non Telugu) besides two Telugu language channels.
RIL, through investments of about Rs 2,600 crore, holds 100 stake in regional news channels (ETV Uttar Pradesh, ETV Madhya Pradesh, ETV Rajasthan, ETV Bihar and ETV Urdu channel), 100 per cent economic interest in entertainment channels (ETV Marathi, ETV Kannada, ETV Bangla, ETV Gujarati and ETV Oriya) and 49 per cent economic interest in ETV Telugu and ETV Telugu News.
This leaves out the print media unit Eenadu Publications and Priya Foods, two business divisions that comprised as much as two thirds of its total revenues in FY09. Given Eenadu Publications’s stronghold in the local market that would also comprise bulk of the profits of the group.
This means RIL valued the broadcast business of the group alone at around Rs 2,600-3,000 crore (since it has only around half of the Telugu language channels). Latest financials are not available but during FY09, Ushodaya had slipped into losses with EBITDA shrinking to FY07 levels.
Now RIL is selling most of this to Network18 in a deal that would pocket as much as Rs 2,100 crore. Since RIL has termed the deal as ‘profitable’, it means it has valued the remaining stake (50 per cent in the general entertainment business and 24.5 per cent in Telugu channels) at more than Rs 500 crore.
This looks like an aggressive valuation at which Network18 is buying a part of Ushodaya. Specially, given the fact that broadcast industry is facing huge profitability issue (barring some exceptions such as Zee Entertainment).
So Where Does That Leave Ushodaya’s Valuation Journey?
If the latest numbers are an indication, Blackstone could have made huge returns if it invested in the flagship firm of the media group in 2007-08. Indeed, Ushodaya went through a loss-making period in 2008-09 as did most other Indian media firms.
But then would Blackstone have managed to secure a similar sweetheart deal like Reliance-Network18. What do you think?