After much excitement and months of lively speculation in anticipation of a clash of global media titans in our very own backyard, India’s next great big glorious deal turned out to be an unexciting financial transaction (except for its high price) with an investor who has been part of the Zee money mix for almost two decades.

The most awaited media deal in India was an anti-climax. It wasn’t Comcast, Sony, Reliance Jio or some Chinese tech company that bought into one of the largest and most profitable media firm in India. On 31 July, after more than nine months of speculation, it was the U.S.-based Invesco Oppenheimer Developing Markets Fund that took 11% in Zee Entertainment Enterprises for roughly US$600 million.

“The street was hoping for a foreign strategic investor to trigger an open offer, but eventually it came to a financial transaction,” says Mihir Shah, vice president (India), Media Partners Asia (MPA).

Zee is among India’s top three broadcasters and a cash-spewing growth machine. At a leading 19% viewership share in the world’s second largest TV market, the Zee network of 41 channels in 10 languages is a prized asset. It is the only competitor that gives Disney’s Star India – currently number two on network share – a good fight. On revenues of just under US$1.2 billion, it had an EBITDA of US$364 million in the financial year ending March 2019. This has grown at a scorching 16.3% over the last five years.

In November last year, Subhash Chandra, chairman of the US$4.3-billion Essel Group and the man who created Zee, announced that the firm was looking for a strategic partner to scale up globally.

One part of this was triggered by the Disney-Fox deal and the changing nature of the US$24-billion Indian media and entertainment market.

The game has simply got bigger with the US$2-billion+ Star India joining hands with the US$10-million Disney India. There is the US$5.5-billion Reliance Jio (which also owns Viacom18) and Sony, which is just under a billion dollars in top line. Then there is Google, which is huge at over US$1.3 billion in India revenues, a fifth of that coming from YouTube. The media game will be played among these firms, possibly along with Bharti Airtel, one of India’s largest telcos.

Almost every major media firm is looking to acquire heft and Zee is one of the few large, dominating firms left. A Comcast-Zee combination could have had the firepower to take on Disney-Star or Reliance Jio.

But in the end, the second reason Zee was selling equity was the reason that ruled.

At a group level, Essel had piled up a huge debt of reportedly over US$2.5 billion and the collateral was the promoter’s equity in various businesses. The only way of deleveraging was to sell stakes in media and non-media assets. Invesco, one of the oldest investors in Zee, has held an 8% share in the firm for 17 years; it simply picked up more. A convenient deal.

However this brings neither money (that goes to the lenders) nor a strategic partner into Zee.

Why on earth should a profitable firm do this?

“This was a better deal because it was meeting my timelines,” points out Punit Goenka, Zee’s managing director and CEO.

The group has to settle everything with its debtors by 30 September this year. “If we had more time we could have done that [brought in a strategic investor]. But since Black Friday (25 January 2019, when Zee’s stock crashed by over 30%) we have been fighting. My conjecture is that strategic investors were looking for a bargain,” Goenka says.

They would, say analysts, since this was a distress sale of a good asset.

What raised eyebrows was the price of Rs400 per share Invesco paid. This was way higher than the Rs360 or so the share was trading at the time. But “at least the floor price of the Zee stock has been reset,” said Goenka in an analyst call to announce the deal.

The promoters still own about 25% of Zee stock and they haven’t ruled out another sale to a strategic investor. It might chip away at the family’s control over management.

But if Rupert Murdoch can sell Fox to a bigger rival in order to future proof it, why not Chandra?

Published in ContentAsia Issue Four 2019, 26 August 2019