The Competition Commission of India (CCI) clearance overhang is over, we expect the Reliance-Disney merger to close by January-February 2025 post other approvals; there is a high likelihood that a few fringe channels would be shut for the CCI clearance, which may not have a negative impact on earnings. Other peers in the Media & Entertainment (M&E) sector, including broadcasters and global over-the-top (OTT) giants could struggle to grow market share, given RIL-Disney’s advantages, such as content variety that spans genres and support of last-mile via Jio Fibre and Jio Mobile. Better monetization of this content, led by superior user experience, could help it inch closer towards YouTube India, thereby commanding a bigger share in digital media. There is no big delta for TV18, which is trading at a fair valuation after factoring in synergies and higher valuation of the merged company (based on its 6% stake – the best-case scenario valuation of USD 750mn); TV18 may only be a medium- to long-term play once the sports segment losses come off, post fresh cricket auctions after CY27. Peers, such as Z/SUNTV/TVT may struggle to maintain or improve profitability, due to pressure on growth, but are relatively better placed with higher profitability; sustaining premium margins with muted growth rates, despite the might of RIL/Disney may augur well for peer’s valuation re-rating.
Regulatory overhang cleared
The Disney-RIL merger CCI nod clears the way to create India’s largest M&E entity valued at USD 8.5bn or INR 700bn; the merger announcement had come in February. We believe the CCI approval was a major roadblock, given the size of the entity, as it controls 40% of India’s TV market and 33% of the OTT market. This would pave the way for other regulatory approvals – National Company Law Tribunal (NCLT), Ministry of Information and Broadcasting (MIB), exchanges and shareholders, which may take another 3-4 months. Therefore, we expect the merger to close by January-February 2025. We await a detailed order issued by the CCI, which could take a couple of days, providing detail, as to which channels in the portfolio to provide clearance and approval to this deal; RIL-Disney have 110 channels on TV currently; we expect fringe channels to be shutdown to meet the CCI clearance.
M&E peers may feel the pinch
RIL-Disney has a sizeable market share of 42% in the TV segment and 34% in OTT within India’s M&E ecosystem; it controls ~85% of market share in the sports segment on TV and digital, which is the fastest-growing genre, and this would help it scale up market share in the medium term. We believe other linear TV broadcasters, such as Z, SUNTV, and TVT, may not be able to grow ahead of market average or gain market share, due to advantages that RIL-Disney possess, namely: 1) commanding 40% viewership on TV may lead to price hikes, 2) advantage of scale on digital led by last-mile support (Jio Mobile and Jio Fibre), 3) the largest variety of content on TV and digital (sports, movie catalogue, global catalogue, originals, & catch-up TV) and 4) cost & revenue synergies that could drive efficiency and lead to better profitability. Even MNC OTT giants like Amazon and Netflix could see the negative impact due to RIL-Disney, as they may not be able to hike prices significantly and may need to invest more in content to match free content offerings by Jio Cinema.
Jio Cinema: potential to be YouTube of India
Jio Cinema currently has a Monthly Active Users (MAU) base of ~250mn users, as per our assessment, which is largely helped by IPL and other sports content being available free; compared to this, YouTube India has a MAU base of ~600mn users, led by variety of user generated content (UGC) and other video & music content. Our primary checks show YouTube India has a market share of 50% in India’s digital video advertising market, with a size of USD 2.5bn, whereas Jio Cinema and Hotstar ad revenue is in the range of USD 600-650mn. We believe Jio Cinema-Disney plus Hotstar has the potential to become the largest video platform in India in the medium term, helped by a variety of content offerings and even match the likes of large aggregators like YouTube India. Superior user experience for Jio Cinema remains to be a key monitorable for executing revenue scale in the digital platform.
TV18 & NW18 – no big delta on listed companies
TV18 owns a mere 6% in the merged company, which is valued at USD 8.5bn; this means TV18’s entertainment business is valued at USD 500mn today. Based on scale, synergies and better market growth, valuation of this can move up by 50% in the best-case scenario toward USD 750mn. TV18’s market cap today is USD 1.1bn, which implies the news business (balance) is currently valued at USD 350mn, even in a best-case scenario after assuming a higher valuation of USD 750mn for the RIL-Disney entertainment segment. The India news genre market is a mere USD 375mn, and the news segment of TV18 has a market share of 35-40% within that, with an EBITDA margin of 7.5% in FY24; this means the news business is trading at 2.4x FY24 EV/sales and 32x FY24 EV/EBITDA, which is fair in our assessment (Z’s 1.4x FY24 EV/sales and SUNTV at 6.5x FY24 EV/sales) thereby limiting upside for TV18. Further, the merged entity is subject to overhang from big losses by cricket rights – ICC, IPL, BCCI and others may continue up to CY27 (FY28), unless the platform is able to scale up on pay-based revenue for sports, which is a key monitorable.
Higher profitability for peers; sustenance is key monitorable
SUNTV, Z and TVT command an EBITDA margin of 30.2% on average in Q1FY25 vs TV18, which reported an EBITDA loss of INR 1,490mn (Q1FY25) in its entertainment segment and Star India EBITDA margin of a mere 8.5% in FY23. Synergies could see a big boost to profitability of the overall merged company – RIL-Disney; however, higher cost of sports and investment in originals and movies would limit EBITDA margin expansion beyond a point. Peers such as SUNTV/Z/TVT too may face headwinds on profitability to retain growth rates against RIL/Disney; improved profitability (Z guidance of 18-20% EBITDA margin) even with muted growth rates of 3-4% YoY) augurs well for peers and drives valuation rerating in the medium term, which makes the risk-reward slightly more favorable, as valuation is fair – SUNTV/Z core broadcasting business trading at 14.0x and 7.5x one-year forward P/E.