Mumbai: The Network18 group is hopeful of becoming nearly zero debt after it completes rights issues for two of its companies cumulatively worth Rs.4,000 crore ($720 million). With Reliance Industries Ltd backing the offerings with its financial muscle, their success is hardly in question. The question is whether the issues will find enough takers from among minority shareholders.
If minority shareholders shy away from the rights issues, slated for September and October, promoter shareholding in both companies will zoom to more than the 75% limit set by the market regulator, necessitating an open offer to buy out remaining minority investors. One possible outcome is that Network18 Media and Investments Ltd and TV18 Broadcast Ltd would soon become privately held companies.
The rights issue price “was expensive, considering the market price and market environment,” said Arun Kejriwal, director of Kejriwal Research and Investment Services Pvt. Ltd. “The only comfort with the high and unrealistic pricing is the fact that the promoter group has underwritten any unsubscribed portion by shareholders. It appears in all probability that subscription would come only from this quarter.”
Network18 and TV18 aim to raise Rs.2,700 crore each. But Network18 owns a majority stake in TV18 and will invest Rs.1,400 crore in its subsidiary company from the funds it receives in its own rights issue. On a net basis, therefore, the two companies will raise Rs.4,000 crore. Proceeds of the sale will be used to finance the acquisition of television channels of Hyderabad-based Eenadu group and to repay debt.
On a consolidated basis, as on 31 March, Network18 had borrowings worth nearly Rs.2,400 crore. More importantly, it reported a consolidated operating loss of Rs.270 crore, over and above which it had an interest cost liability of Rs.273 crore. Even after adjusting losses of businesses which the company has stepped out of, the operating loss stood at Rs.206 crore. Operating cash flow was a negative Rs.249 crore and free cash flow stood at a negative Rs.335 crore. Needless to say, with cash flow running negative, the company will not be able to service its bloated debt. Put simply, the company needs an urgent cash infusion.
The rights issue is meant to fill this hole. And the media group has found a saviour in Mukesh Ambani’s Reliance Industries, which has agreed to make an investment in Network18’s promoter group companies through a newly created vehicle called Independent Media Trust. The promoters, led by Raghav Bahl, will use funds received from the Trust to subscribe to their share of the rights issue, apart from buying Reliance’s stake in the Eenadu channels.
Based on the two companies’ latest disclosures, promoters own 48.3% of Network 18, which in turn owns 51.2% of TV18.
The media group’s agreement with Independent Media Trust includes funding not only for the promoters’ share of the rights issue, but also for any portion of the issue that may remain unsubscribed. This makes the issue, to use Kejriwal’s words, an underwritten one.
Network18 shares have been priced at Rs.30 apiece and TV18 shares at Rs.20 each—a discount of only 5.6% and 5.2%, respectively, over their share price on the day of the announcement. Rights issues are typically priced at a discount to entice investors. Investors were naturally disappointed with the rights issue pricing, with the share prices of both companies falling soon after the rights ratio and pricing was announced. In fact, shares of both companies had fallen below their respective issue prices.
Both shares have suddenly risen in the past few sessions. Network18 trades at Rs.31.7 and TV18 is priced at Rs.24.4, 5.7% and 22% higher than their rights issue prices, respectively. There has been no news development to justify the price increase. Nevertheless, the fact that the rights issue price is now at a discount may entice some investors.
The media group is also up against weak investor sentiment in India, which is downbeat because of declining economic growth, high interest rates and inflation, and uncertainty over government policies. But as the head of research at an MNC broker pointed out, this hasn’t stopped large stake sales such as the recent one by BT Group Plc. in Tech Mahindra Ltd worth nearly Rs.1,400 crore. It must be noted that BT sold at a 7% discount to prevailing market price.
The research head, who didn’t want to be named, added that the media group will also face the challenge of high equity dilution. The group is expecting investors to increase their investments in the company by 4-6 times the current value of their investments. Network18 Media and Investments’ rights will be issued at a ratio of 307 shares for every 50 shares currently held in the company, or 6.14:1. The ratio for TV18 Broadcast’s rights has been set at 41:11, which means a near quadrupling of investment.
The research head said investors may get drawn if they see a strong business case and believe that the only thing that’s ailing the group is its debt. Jagannadham Thunuguntla, head of research at SMC Global Securities Ltd, said, “The major concern for the Network18 group has been its debt, with the rights issue proceeds that will be addressed and it seems like the company will get back on track. The balance sheet will look much better and business more smoother.”
Since Reliance is willing to bankroll the entire transaction, Network18’s hopes of becoming nearly debt free will easily materialize. But even after the news of Reliance’s financial backing came in earlier this year, shares of both companies had declined.
Some investors may well be waiting to see results of the group’s debt restructuring and the fallout of its entry into regional channels before making their investment decision.
Besides, while the fund raising will address the debt problem to a large extent, it does little to address the losses at the operating level. And a large part of the funds will be used to acquire regional channels run by the Eenadu group.
In this backdrop, getting minority shareholders to subscribe may not be an easy affair. And if non-promoter shareholders shy away from the rights issues, the fallout will be that promoter holding in Network18 and TV18 will jump to over 75% post the rights issue, which would be in breach of the minimum public shareholding norms set by the market regulator.
Securities and Exchange Board of India (Sebi) has set a June 2013 deadline for companies to reduce promoter holding to below 75%. To avoid breaching the deadline and keeping minority shareholding above 25%, the two companies will need to raise around Rs.450-500 crore each from non-promoter shareholders.
According to a Mumbai-based chartered accountant who didn’t want to be named, the company can potentially avoid a delisting if Reliance Industries buys the unsubscribed portion of the rights issue either directly or through the Trust, rather than funding the existing promoters to buy the unsubscribed portion.
In his opinion, since the transactions between the two companies have been at arm’s length, the Sebi’s “persons acting in concert” stricture may not necessarily apply. In February this year, the promoter group transferred a stake of around 1.9% to Independent Media Trust at prevailing market price in a block deal.
Network18 has a presence in the television broadcast space through news and general entertainment channels, print media, film and Internet/new media businesses. Bahl, founder of the media company, has crafted joint ventures with media houses such as NBCUniversal, Viacom, CNBC, Time Warner, Forbes, A&E Networks and Korean company GS Home Shopping.