Restrictive rules to dampen deal activity in radio sector
The 31st of March is an important date for the private FM radio sector in the country. On this day, the lock-in period that had disallowed the sale of radio stations will end for stations launched under phase II auction of radio privatization. These were the channels which were renewed (or “migrated” in government parlance) from April 2015.
This leaves the field clear for private FM radio companies to buy and sell stations. So, will there be deal activity in this sector after 31 March? The answer varies depending on who you ask. While some radio operators admit to heightened deal activity, others say the momentum is slow.
According to Vineet Singh Hukmani, managing director and chief executive of Next Radio Ltd, the operator of 94.3 Radio One (with channels in seven metros), there is a fair bit of activity with radio companies trying to regularize deals already done prior to the expiry of the lock-in period and new ones being discussed. However, Times Group-owned brand Radio Mirchi’s chief executive Prashant Panday says that nothing big seems to be brewing, although some smaller deals may be struck.
Why mergers and acquisitions (M&As) in the sector make sense at this juncture is easy to see. Essentially, large radio companies are finding it hard to grow their revenues at viable costs. “Mergers and acquisitions is the only way for large players to grow topline and market share. Anyone having cash issues like single-city stations will be the first to attempt to sell,” says Hukmani. He expects both single-city stations as well as networks in smaller cities to merge or be acquired.
Adds Panday: “In the radio business, the costs of licences are so high that many broadcasters, we believe, are bleeding. They may be willing to sell.”
However, existing regulations in the sector may be a dampener for deal activity. “In India, we have arbitrary city-level caps. Except in the top 13 cities, no broadcaster can hold more than one channel in any city. This hugely restricts M&A activity. Likewise, there is a national cap which can also trip any M&A deal,” says Panday. The national cap he is referring to is the 15% cap on channel share nationally. (This cap does not include “border towns” like in Jammu and Kashmir, the North-East, etc.). City-wise, there is a 40% cap on channel share.
So, while there may be restrictions, if deals happen, they will affect the radio sector in a positive way. “The players that do deals quickly will see topline growth. Otherwise, they will have to spend more money to buy toplines like they do now with heavy activation,” says Hukmani. At a strategic level, a merger/acquisition opens up a healthy opportunity to go public if the combined entity has an improved operating profit and lower debt, he adds.
However, whether deals help the radio sector meet its challenges remains to be seen. For starters, radio broadcasters need to cut ad volumes or else listeners will abandon the medium. To cut ad volumes, they need to increase the ad rates. Then, there is the challenge from digital streaming apps and downloading of music. “Because of widespread availability of smartphones and broadband (and the heavy ad volumes on FM), some listeners are starting to divert some of their time to digital. It’s not like they’re giving up on FM, but they are splitting their time,” says Panday.
Besides, there are not enough radio stations in major cities. Metros like Mumbai, Delhi and Bengaluru cannot have just nine channels each when all the big cities in the world have more than 25 stations. The government should quickly auction more frequencies and make more channels possible by reducing channel separation (the spacing between two adjoining FM channels). But executives at radio firms say that auctions will fail unless the government cuts the reserve fees, which is among the highest in the world. They urge the government to move quickly on to the next phase of auction, announced in December.
Currently, the private radio industry is pegged at about Rs2,100 crore. “It was growing fine at 12-13% until FY16, but because of demonetization, the FY17 growth tripped to about 8-9%,” says Panday, adding that he does not expect the sector to grow more than 5-6% in FY18 owing to demonetization, Real Estate (Regulation and Development) Act, and the goods and services tax. “The prospects of the industry remain strong though. I believe the industry can clock 15-18% per annum in the next five years, if the economy rebounds.”
HT Media Ltd, which publishes Mint, owns Fever 104 FM and Radio Nasha that compete with other radio stations in several markets.
Shuchi Bansal is Mint’s media, marketing and advertising editor. Ordinary Post will look at pressing issues related to all three. Or just fun stuff.