Publishing group Bennett, Coleman and Co. Ltd’s, or BCCL, controversial ad-for-equity business model, Times Private Treaties, is changing the way it does its business of exchanging ad space for a stake in a client company. For one, the company has started taking 40% cash and the balance in equity on new deals since cash flow is the primary concern now. BCCL, the publisher of newspapers such as The Times of India and The Economic Times, aims to keep revenues from Treaties clients in the 15-20% range of the total company revenues.
In an interview with VCCircle, S. Sivakumar, Chief Executive Officer, Times Private Treaties, talks about the concept of Treaties, how it has evolved over the last five years, and if the model is indeed working. Edited excerpts:
How has the slowdown affected Times Private Treaties?
Slowdown has really been a testing time. Our idea was to grow the advertising market, and get as many clients as possible. The challenge for media houses has always been “how do you increase the universe of advertisers?” In (the) Indian context, it’s far more challenging because India has for long been a market of cost plus players.
Treaties comes at the highest stage of risk for us. If there were a better way of raising capital (such as debt), an entrepreneur would have done that instead of parting with equity via Treaties. Somebody who has capital will obviously use his cash for his business—for advertisements, capital expenditure, machines, and so on. So we are the first point of leverage for him. If the market turns the way it has turned now, leverage and equity go out of fashion.
What do you look for in a Treaties client?
Anybody who wants to advertise—that’s the only prism we look at. We don’t necessarily approach them from a return on equity or return on a capital basis. It’s essentially about getting a new advertiser. We will get paid only when we are able to sell the shares. A cash advertiser pays us in 60 days as per the credit norm but a Treaties client payout happens only when we sell the shares.
So fundamentally you are getting new advertisers to the business – is it?
The current advertisers in the system are happy to spend cash so by definition they will not be parting with equity. So only the new set of advertisers will usually go in for an equity model. Most of the Treaties clients are new advertisers. They all will migrate gradually into cash once they have seen traction in business and success of advertisements.
A key thinking at BCCL is that top management should always work for the 10% of revenue because that 10% revenue will become a significant 50-60% revenue in the years to come. TPT, when it was launched, aimed to target a 5-10% of the revenue, which, if everything goes well, would become a significant revenue stream. We are not into this equity game, and we don’t understand the valuation game. Our aim is not to look at multibaggers.
How do you define Private Treaties?
Treaties is about taking an asset from the company and where the value of the asset is dependent on the utilisation of the advertisement space. When you take a share, it’s not dependent on our faith in the fundamentals of the company. It’s dependent on faith in ourselves. This comes from the fact that once someone advertises with us, his return on investment on the advertisement spent will be higher than the cash outflow. If you don’t have the faith that somebody advertising with us will not succeed, then we should not touch his equity.
You have been running (Times) Private Treaties for almost four years, so what has been the result in terms of exits?
We would have invested close to Rs 4,000 crore and the exits would be less than 10%. The Rs 4,000 crore is not fully deployed capital because it will be deployed only when the advertiser consumes the media. a 25% of that Rs 4,000 crore has been consumed. The exits are also a function of the exhaustion of the commitment by the client.
What does that mean?
If 25% of Rs 4,000 crore commitment is used up, we should get Rs 1,000 crore of ad revenues. But we haven’t got it. Our coverage today stands at 80% of it (which means a collection of Rs800 crore instead of Rs 1,000 crore). In terms of accounting on a mark-to-market, or MTM, basis, it’s, of course, a loss.
The buzz was that there was a Rs 500 crore loss from the Treaties business. So, it’s actually a notional loss rather than actual loss?
If we had sold during the peak, we could have made Rs1,000-1,500 crore of MTM profit. But then it’s too theoretical. One is to time the market, but I am not even getting into that because Treaties deals largely have a lock-in (period). In the case of unlisted entities, we cannot sell (unless there is an initial public offering or a secondary deal). Secondly, the losses are not cash losses.
(Interestingly) some of the clients who don’t perform are withdrawing from the Treaties deal. The transaction is squared off after the company pays in cash for the ads it consumed. Since we have been in a slowdown, there are at least 10-20 cases where clients have withdrawn.
If the promoters are buying back from you, what is the kind of return you get?
In that case, there is no return. We square off the deal as the company pays in cash for the adspace used till then.
So, overall, are you happy with the Treaties business?
Absolutely yes. In terms of fulfilling key objectives which we set out for—to transform India from a commodity nation to a brand nation—we have made a beginning. The second was to stir the advertisement market. Third is value creation for Treaties advertisers. The ad market has grown faster in the last three years and it has kept print as a medium very relevant. Also, (our) market share is maintained even in a slowdown.
Editorial vs Treaties—is there any conflict in managing that?
The key point here is that every media house is scared that the advertisement revenue from a single advertiser should not be so dominant that they start influencing the media. So every media house is concerned that not more than 3% should come from a single advertiser. Treaties was born out of this fear. Secondly, Medianet was started by us around early 2004. Around the same time, there was confusion about the link between Medianet and us. Actually, there is none. Medianet is a separate company. Thirdly, here it is all about advertising. As such, we are taking risk. There is equity risk, so why should we take additional risk (by interfering in editorial)? There can’t be any emotional link either.
Wockhardt Ltd is a Treaties client. Look at all the stories that have come in The Economic Times about Wockhardt. Provogue India Ltd is a Treaties client and they have done negative stories on Provogue. Freedom and independence are what keep a newspaper going.
Response is responsible for about 80-90% of BCCL’s revenues. Even Response hasn’t been able to influence the editorial. And then they get cash, while we get only “hope”, so how can we even remotely think of influencing editorial? (Response at BCCL refers to the team that sells ad space, while Medianet is an agency that promotes advertiser-funded content as editorial or new items).
Which Treaties deals have given you the maximum returns?
There are at least five or six of them we have exited at good returns (of 15-20% per annum). They include India Infoline Ltd (a financial services firm), Provogue (India) Ltd (a fashion retailer), Rajesh Exports Ltd (a jewellery exporter) and Pantaloon Retail (India) Ltd (India’s biggest retail chain). Provogue and Pantaloon continue to be our treaty clients as they have done repeat deals (there are at least 20 repeat deals, including a Rs 200 crore deal with Videocon Group). In the unlisted space, Thyrocare Technologies Ltd is buying back our stake, giving us good return.
(Picture: Abhijit Bhatlekar / Mint)