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Event update: Media; RIL buys majority stake in Hathway & Den – Could it be a fortune-changing event for them?

Reliance Industries’ (RIL) purchase of majority stakes in Hathway Cable (HATH) and Den Networks (DEN), key MSOs in India, is the best thing that could happen to them. In one stroke, all three major issues plaguing these two companies have been resolved. Firstly, funds infused will be used to take care of high leverage in the case of HATH (FY18 Net Debt/EBITDA at 4.9x vs DEN’s 0.8x); Secondly, it will provide funds to undertake capex (well capitalized parent), and lastly, the biggest risk of competition is addressed as they will be the ones who would now be the most aggressive as they are part of Jio. In its press release, RIL applauds the Local cable operators (LCOs) for their efforts in building last-mile connectivity and says that its investment in MSOs will strengthen the LCO community and ‘create multiple future opportunities for them’. RIL does not specifically mention how the transaction will help the MSOs. We would have upgraded these MSOs to an Outperformer (from the current Neutral stance); however, we move them to ‘Under Review’ as we await clarity on where (i.e. in which entity) the economic interest of the connected subscriber will be captured and whether these two MSOs will be used only as a means to increase homes passed penetration. Consolidation in the MSO space is negative for Broadcasters; however, as of now we are not changing broadcaster financials or multiples (Zee Ent., OP and Sun TV, OP). Well capitalized MSOs is a negative for the DTH space (RIL in its press release specifically mentions that DTH has taken away market-share from LCOs) and hence we lower our target multiple for Dish TV by 20% to 8x arriving at a PT of Rs84, retain OP.

The deal

• Primary investment of Rs20.45bn through a preferential issue and secondary purchase of Rs2.45bn from the existing promoters for a 66% stake in DEN (at a price of Rs72.66/share).
• Primary investment of Rs29.4bn through a preferential issue for a 51.3% stake in HATH (at Rs32.55/share).

Impact on other players in the Broadcast value chain

• Local cable operators: The Indian cable industry is unique with last-mile ownership resting with fragmented local cable operators. Jio’s key reason to buy into the MSOs is to get live LCO relationships which would help Jio gain last-mile access, the biggest hurdle to a successful FTTH network. We believe that LCOs bargaining power gets drastically reduced after Jio buying into the two largest MSOs. Initial resistance aside, LCOs would be amenable to cooperating with Jio provided they continue to earn as much as they are currently earning from each household even in the new set-up.
• Broadcasters: As the distribution space consolidates (Jio would own the two largest MSOs), broadcaster negotiating power might get curtailed and could hurt their ability to post good growth in subscription revenue from these two MSOs. This would be negative for Zee Entertainment (Z) and Sun TV Network (to a lesser extent), although we are not changing our estimates/multiples as of now.
• DTH operators: The entire DTH space has benefited from leveraged balance sheets of MSOs as the bulk of the new ‘Pay TV’ subscribers were lapped up by DTH players through aggressive packs and reach. As of now we are not sure about Jio’s plans for both HATH & DEN; however, suffice to say that Jio will focus on dual-play offerings (Broadband and TV) and well capitalized FTTH focused MSOs would be an incremental threat to the DTH industry, including listed players such as Dish TV (DITV). We are not changing our estimates for DITV; however, we lower its target multiple by 20% to 8x (vs 10x earlier), and lower our price target to Rs84 (vs 111 earlier). We maintain Outperformer given its recent sharp fall and continue to believe that synergy benefits would continue to accrue with scale coming in.

Could the deal be a fortune-changing event for MSOs? The answer is not that simple!

Jio’s rationale of buying into the MSOs is to gain access of the last-mile. However, MSOs do not own the last mile and can expedite homes passed only with the help of LCOs who are business associates. As for now, we would like to understand in whose financials would new broadband subscribers reflect that come through HATH/DEN’s LCO relationships (if it is in these MSOs then these companies can create significant value, for minority shareholders, over the medium term) or under RIL’s arm Jio directly? (in which case the MSOs might not benefit greatly). In our view, the best outcome would be to merge these MSOs with RIL’s arm Jio, over a period of time. We move both HATH and DEN to ‘Under Review’ as we improve our understanding on the aforementioned issue.