Business Today

Bailout saga

Anusha Subramanian        Print Edition: Feb 5, 2012

In 2008, Reliance Industries (RIL) Chairman Mukesh Ambani bailed out Ramoji Rao of Eenadu, a Hyderabad headquartered media house. In 2010, a conversation between corporate lobbyist Niira Radia and a journalist, taped by income tax investigators, alluded to RIL wanting to support NDTV. And now, in 2012, Ambani is lending a tidy sum to Raghav Bahl, promoter of the Network18 Group. Clearly, Ambani is the go-to man for media moguls in distress.

On January 3, Ambani and Bahl confounded all and sundry when they announced an optionally convertible debentures (OCDs) deal that is widely seen as a lifebuoy for the debt-laden Network18 Group.

The deal, structured between an RIL trust and unlisted companies of the Network18 Group, stood out for its opacity even if it did not contravene any rules. RIL's press release stated that the deal would give the group's broadband subsidiary, Reliance Infotel, preferential access to Network18's content for its 4G mobile data services platform.

In reality, however, it could give Ambani control over 17 news channels in the English, regional and business genres, including CNN-IBN, CNBC TV18 and IBN 7. Nowhere in the press statements was it mentioned how much RIL would lend but the money that Bahl and promoters of Network18 need for a proposed rights issue of two listed firms is Rs 1,700 crore. Under the terms of the multi-layered deal, Independent Media Trust, set up by RIL, will subscribe to OCDs being issued by the unlisted promoter companies of Network18 Media & Investment and TV18 Broadcast.

Network18 and TV18 are coming up with rights issues of Rs 2,700 crore each and the promoter companies will invest in them using the money they receive from the RIL trust. Given that Network18 is the majority owner of TV18, the net amount raised will be about Rs 4,000 crore.

The two Bahl companies will use this money to reduce their combined debt - Rs 2,116 crore as of September 30, 2011 - and partially buy RIL's holding in Rao's television channels, grouped under Ushodaya Enterprises, for Rs 2,100 crore (see RIL: Big Brother) giving the Ambani company a solid return on its investment.

NO ANSWERS YET

What is the nature of the optionally convertible debentures in the deal between RIL and Network18?

What is the coupon rate of interest on the OCDs?

If RIL’s Independent Media Trust decides to convert the OCDs, what will its stake size be?
Bahl has the option to buy out the remainder of RIL's holding - 50 per cent in the non-Telugu entertainment channels and 24.5 per cent in the Telugu news and entertainment channels at a later stage.

But, a senior media source close to Bahl indicates that it has probably been left for Viacom Inc. to pick in an all-cash deal. Viacom is a 50 per cent partner in Viacom18, a Network18 company.

"It's complicated," says Kalpesh Makwana, Deputy Vice President, Metals, Mining and Media, Quant Global Research. "There are several unanswered questions. But, the two main questions are over the structure of the debentures and the final ownership (of Network18) by RIL, post-conversion of the OCDs." In other words, will RIL gain control over Network18 if it exercises its option of converting its debentures into equity? A Network18 press statement was cryptic over ownership.

Bahl, it said, "shall continue to retain management and 51% control over Network18 and 51% control over TV18 through Network18". It also isn't clear when the option for RIL to convert will come up. BT has been in touch with both RIL and Network18 spokespersons over the telephone and email. Neither side had responded at the time of this issue going to press.

Rao, founder of the Telugu daily Eenadu, also owns the ETV network of channels. As with Bahl now, Ambani had bailed him out of a financial pickle in 2008. His chit fund company, Margadarsi, which was said to have collected Rs 2,600 crore from the public, was accused of delaying repayment to several depositors. The matter went to the Andhra Pradesh High Court and Rao had to assure it that he would repay the amount. He cracked a deal with Blackstone, the world's largest private equity firm, but it failed to pass regulatory muster. Soon after, Ambani stepped in to the rescue.

Some details of that bailout emerged two years after Andhra Pradesh chief minister Y.S.R. Reddy's death when his widow Y.S. Vijayalakshmi filed a petition in the state's High Court in October 2011. She was seeking a probe into the assets of former chief minister N. Chandrababu Naidu, who counts Rao as one his most influential supporters.

Among other things, the petition alleged that Ambani bailed Rao out through two companies, Equator Trading and Anu Trading, controlled by Nimesh Kampani and Vinay Chajlani, respectively. The companies, it added, invested Rs 2,600 crore in the loss-making Ushodaya Enterprises, which runs Eenadu TV, in 2008. The premium paid on the shares amounted to a whopping 528,630 per cent. Ushodaya recorded a net loss of Rs 56.6 crore in 2007/08, according to an ICRA Ratings report released in March 2011.

RIL's January 3 press release put out details of its shareholding in Rao empire for the first time. Both the Network18 and Ushodaya deals raise many questions: what was the rationale for the valuation of the Ushodaya deal? Does it make sense for the RIL shareholder? Why didn't RIL disclose the investment earlier? Are the minority shareholders of TV18 being treated fairly, considering that their holding will get diluted if they do not subscribe to the rights issue?

Bahl refused to lift the cloak of secrecy on an analyst call on January 3 but when the call ended, many concluded he had sold out to Ambani. "TV18 has paid aggressively for the ETV channels," says Ritwik Rai, media analyst at Kotak Securities. In a report on the deal, he notes that TV18 has acquired only 50 per cent of the non-Telugu entertainment channels, and only 24.5 per cent of the Telugu channels - which make significant revenues for ETV. "…TV18 has likely overpaid by Rs 1,260 crore - significant considering its market capitalisation," says Rai.

Few doubt that but for more clarity investors will have to wait for Ambani to exercise his option on the RIL trust debentures.

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