m&a
DESCRIPTION
Mergers & Aquisition ProjectTRANSCRIPT
Reliance (RIL) Acquires Network 18(2014- July)
M&A Mid Term Review
Context
Reliance Industries Ltd.• Mukesh Ambani – Chairman and MD• Oil and gas; petroleum refining;
petrochemicals. Operates directly, subsidiaries and joint ventures (collectively referred to as the “Reliance Group”)
• Deal was beneficial to RJIL which could access Network18 ‘s digital content
Network 18 • Founded by Raghav Bahl in 1993, went
public in 2006 • Digital, publishing and e-commerce
assets including moneycontrol, ibnlive, HomeShop18 and bookmyshow ; TV18 - subsidiary
• Debt issues in 2011 – Rs.1400 crore
The trigger Sometime in early March, Sardesai had got a call from Ambani, who was livid.
2008
2013-14
• Network18 initiated an aggressive acquisition strategy(diverse sectors- media and entertainment business, ranging from general entertainment channels to movie production, e-commerce, consumer led print magazines (Forbes India), website for stock markets (moneycontrol.com) )
• Strategy did not reap benefits at the pace of the expansion
• 2008 - RIL bailed out Eenadu Group Owned BY Ramoji Rao • Showed RIL’s interest in the media sector and the synergies between media and telecom
• 2011 – Network 18’s consolidated loans > INR 25 billion; while the overall revenues = INR 16 billion• 2011, cash cow- news television business under pressure due to economic downturn ; advertising revenue had dried up• Late 2011: CEO, network 18 : Haresh Chawla: reasoned with Bahl to raise money through divesting a stake in
entertainment business to Viacom 18. After Bahl refused, Chawla quit the company.
• January :Mukesh Ambani bails out Network 18, buying out Rao’s ETV• Access to exclusive content across segments for Reliance to foray into 4G services for RJIL
2013-14 - The financials of Network18 Group improved. The consolidated losses reduced from INR 1050 million in 2012-13 to INR 367.7 million in 2013-14; restructuring ; layoffs and selling unprofitable business
28th may : Network 18 Chief Executive Officer B. Sai Kumar and Chief Operating Officer Ajay Chacko put in their papers.29th may : RIL buys network 18 in a ZOCD deal
2012
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2014
2011
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Network 18 share Price
Share Prices increased by 20% the Next DayAnd subsequently 5%, 10% , 10% in the next three days
Share Prices remained more or less constant, the price fluctuation was 1% on both sides, hence the deal did not impact the share price
Market Reaction
Independent Media TrustRIL
Repay Debt Buy RIL’s holding in ETV
Special vehicle
2012 - ZOCD – convertible within 10 years
Repa
y th
e de
bt
Network 18 TV 18
2014
- Co
nver
ted
ZOCD
and
ac
quire
d m
ajor
ity
stak
e
NATURE OF THE TRANSACTION
Raised 4000 cr – rights issue
78% 9%
STRATEGIC FIT• Synergy between Network18 and Reliance’s 4G play
in the telecom business through Reliance Jio Infocomm .They needed a content factory of enormous scale. It was a unique amalgamation at the intersect of telecom, Web and digital commerce via a suite of premier digital properties.
• To put it simply, with 100% control, RIL now has access to all the content put out by the Network18 Group. This includes in.com, IBNlive.com, Moneycontrol.com, Firstpost.com, Cricketnext, bookmyshow.com and TV channels such as Colors, CNBC TV18, CNN-IBN, IBN7 and CNBC Awaaz
One such instance can be of US telco firm AT&T buying Direct TV.
• At the same time, a turn of events: Gas Pricing Issue : In order to get a grip over the whole gas pricing affair (FIR over alleged irregularities in the pricing of natural gas from the KG- basin ) Reliance wanted to ensure that nothing goes against them in the gas pricing issue Nira Radia Tapes : A conversation between corporate lobbyist Nira Radia and a journalist, taped by income tax investigators accusations about crony capitalismComplete control over one of the largest media companies in the country, with a presence across television, print and digital, helps to put across one’s point of view.
How did the merger proceed
IMT made Rs.9.96 billion investment into Network18
through ZOCDs(>51% stake if converted)
DCPL became the trustee of IMT and no change of control
in Network18
In May 2014 Reliance takeover bid to Network18
IMT and RBHPL entered into SPA in May29 (100%)
IMT acquired controlling stake in Network18(71.25%)
and TV18(55.03%) and Infomedia(47.6%)
IMT offered open offer to public share holders of
Network18 and Tv18 and InfoMedia
Reconstituted the Board by replacing
with acquirer nominees
DCPL was removed as the trustee of IMT
Issues in Merger
There were no issues raised by promoters of RBHPL because• ZOCDs were not converted instead stake was bought from Raghav and Ritu
Bhal• It was considered a friendly takeover • Raghav and Ritu got out with cash instead of stake dilution if ZOCDs were
convereted• CCI concluded that it was unlikely that the proposed combination would have
any adverse effect on competition in India
Stakeholder Reactions
CCIThe CCI started monitoring the transactions right from the time RIL subscribed to ZOCDs of Holding Companies of Network 18. However the CCI concluded that the proposed combination would not have any adverse effect on competition in the industry
ConsumersMedia consumers and other media houses viewed the deal with suspicion as they were of the view that Reliance would be able to influence media opinion about its business practices and deals as Network 18 was one of the largest media conglomerates in India with a reach across all channels
EmployeesThere hadn’t been any significant disapproval from employees as Raghav Bahl had already started restructuring and laying off in 2011. It was unlikely that more employees would be laid off as the bottom line position pf the group had significantly improved
Target Company ManagementPromoters Raghav Bahl and Ritu Kapur had accepted the offer made by Reliance and had communicated the same to the BODs of the companies being acquired. As a result the deal went through within less than 2 months
Deal Structuring
Acquisition vehicle Post-closing organization Form of payment Form of acquisition
Legal form of selling entity
Accounting Considerations Tax considerations
Deal Structuring
Form of acquisition
• Indirect acquisition: By acquiring the Holding Companies, the Acquirers acquired 71.25% of the Network18 Emerging Voting Capital; 55.03% of the TV18 Emerging Voting Capital; and 47.60% of the Infomedia Emerging Voting Capital.
•Open Offer:
Open offer made by the Acquirers to the public shareholders of the Indirect Targets to acquire as follows: Network18: 21.95% of the Network18 Emerging Voting Capital; TV18: 26% of the TV18 Emerging Voting Capital; Infomedia: 26% of the Infomedia Emerging Voting Capital.
Acquisition vehicle
• IMT was set up pursuant to a trust deed dated November 2, 2011 (“Trust Deed”) for the purpose of making investments.
• RIL is the sole beneficiary of IMT as per the Trust Deed. RIIHL, a wholly owned subsidiary of RIL, was appointed as the ‘Protector’2 of IMT
• The board of trustees administers and manages the affairs of IMT in accordance with the Trust Deed. All decisions of the board of trustees are taken by way of majority vote of the trustees. The maximum number of trustees permissible under the Trust Deed is 12.7
Form of payment
Indirect Acquisition: The consideration for the acquisition of the Holding Companies was approximately INR 32.2 billion (USD 536 million), attributable as follows:
74,61,88,987 equity shares of Network18 at a price of INR 41.04 per share aggregating to INR 30620 million (USD 510.33 million);
6,77,33,486 equity shares of TV18 at a price of INR 30.18 per share aggregating to INR 2040 million (USD 34 million).
Form of payment
Open Offer:
22,99,46,996 equity shares of Network18 at a price of INR 41.04 per share, aggregating to INR 9,437 million (USD 157.28 million);
44,65,10,110 equity shares of TV18 at a price of INR 30.18 per share, aggregating to INR 1,3475 million (USD 224.58 million);
1,30,62,224 equity shares of Infomedia at a price of INR 3 per share, aggregating to INR 39.18 million (USD 653,333).
Legal Issues
•As per the CCI order dated May 28, 2012, CCI had held that by subscribing to the ZOCDs, which could convert into 99.99% equity shares of the Holding Companies, IMT acquired control over the Holding Companies. Accordingly, it seems that the approval of CCI was not required under CA 2002.
•By virtue of acquisition of the equity shares of the Holding Companies, IMT acquired control over Network18, TV18 and Infomedia. Accordingly, an open offer had to be made by IMT along with the PACs for Network18, TV18 and Infomedia.
Tax Considerations
•Raghav and Ritu would be subjected to capital gains tax under the ITA for the sale of the equity shares of the Holding Companies i.e for the amount of consideration received for the sale of the equity shares in excess of the price paid by them for the acquisition of the respective shares.•If the shares are held by them for a period in excess of 36 months, the gains would be taxed as long term capital gains. However, if the period of holding of the shares is 36 months or less, Raghav and Ritu would be subjected to short term capital gains tax•Additionally, Raghav and Ritu, being residents would also be entitled to indexation benefits under section 48 of the ITA.
Tax considerations
•Under section 56 of the ITA, if any company or firm receives property, being the shares of a company at a consideration below the fair market value of the shares, the difference between the consideration and the fair market value would be taxed in the hands of the acquirer.
•As mentioned above, the tax implication under section 56 (2)(viia) would be applicable only where the recipient is a ‘firm or a company’
Deal Structuring
Regulatory and Legal Issues
• The definition of ‘shares’ under CA 2002 clearly includes such instruments as ZOCDs• Upon analyzing the segments in which RIL and Network 18 group are present CCI concluded that
the proposed combination would not have any adverse effect on competition in India
Did investment in ZOCDs require CCI approval?
• ZOCDs do not fall under the ambit of ‘shares’ under the Takeover Code, unlike the CA 2002• With respect to control, the trustee of IMT was DCPL, which was owned by Raghav and Ritu and hence
there was no change in control• Therefore the investment in ZOCDs in 2012 did not require an open offer under the Takeover Code
Did investment in ZOCDs require open offer under
the Takeover Code?
• To provide semblance that the transaction does not result in a change in control, RIL decided to invest through a trust
• The first trustee of IMT was DCPL controlled by Raghav and Ritu. This means that there was no change in control happening and consequently the obligations under Takeover Code would not be triggered
• Also, the trust with Raghav as trustee would incentivize him to enter into the transaction and also the trust would give an image of integrity of Network 18 remaining intact
Why did RIL use IMT as an investment vehicle instead
of investing directly?
Current Situation
Intended objectives Benefits Access to Exclusive content across segments for Foray into 4G
Network 18 could act as a PR agency for Reliance Group
Cash infusion into Network 18 Group
Porter’s 5 Forces AnalysisThreat of New entrants
Capital Intensive , RegulationsContent generation, Creative ManpowerDirect Operating Cost HighHigh Capex, Promotion Expenditure
Threat of Substitutes-• Other forms of Media present• Online Content
Bargaining Power of Suppliers• Content providers play a
crucial role• Depending on the content ,
the channel gets viewership
Bargaining power of Buyers• Two Types – AD & General Viewer• Depends on Content and Viewership• High viewership High Bargaining
power of Channels, else otherwise
Rivalry Among Existing Firms
- High
Entry Barriers High
HighMedium to High
Medium
Thank You