Foreign partners need more than FDI to buy into DTH

MUMBAI: Amid the euphoric sentiment in Indian cable and direct-to-home (DTH) companies to attract global strategic investors, two industry captains have cautioned that permission for more foreign direct investment (FDI) will have to be backed by some supportive government policies and corrective measures from the players themselves.

"Earlier 49 per cent FDI was allowed but nobody has touched that limit yet. So just giving majority control to foreign investors is not enough. A conducive business environment has to be created to make the industry profitable," says Dish TV managing director Jawahar Goel.

Goel‘s suggestions: lower government taxation, a healthy business environment and better handling of investor capital.

Star India chief executive officer Uday Shankar believes that the government has taken a step in the right direction but a few liberalisation policies need to come in before strategic investors decide to join the party in
 India. "India is an emerging market and both DTH and cable TV areemerging sectors.

They would require huge funding support to address such a large cable & satellite (C&S) universe. The global strategic investors need policy corrections that will help the sector turn healthy," he says.

The door for global companies has opened to pick up 74 per cent in the fast-growing broadcast-carriage services sector that requires around Rs 250 billion of capital to digitise India. Comcast, Liberty and Time Warner are a few familiar names who have wanted to shop in this unlocked value-potential sector even before and have evaluated Indian companies. However, concerns about profitability, scale, structure of the industry and business models remain and they will be in no hurry to deploy their cash hoardings.
In the wake of the government mandate to shut analogue cable across the country by 31 December 2014, the new ceiling for FDI is definitely a positive step to boost investments into the sector. A new line of funding will be available for the companies to tap. It will, however, be like living in a cuckoo land if you are to expect money to pour into the DTH and cable companies in a hurry.

A few soured investments in the media sector have made foreign investors cautious. Agrees Goel, "We will have to take up the responsibility of running the industry well. We have seen bad examples across the broadcasting value chain. If we cut the throats of investors, nobody can save us."

Foreign investors will wait for the performance of the first phase of digitisation in the four metros before they swing into action. "It is not like the industry is profitable and healthy that once the government allows foreign investors to hold majority interest, the funding taps will open. There are other issues that will influence decisions," says a media analyst.

The talks for equity partnership may start but in all likelihood it will take time for them to conclude. The good news is that the animal spirits of Indian entrepreneurs will be revived and business sentiment drastically improve.

The upper ceiling on FDI is a sweet spot that will encourage private equity and institutional funding to step in first as the strategic investors wait longer to marry the Indian companies. "Foreign institutional investors and private equity firms may come in and look at diluting to global strategic investors later," says a senior fund manager on condition of anonymity.

In a two-part series, will look at the prospects of the DTH and cable companies to induct foreign capital. We kick-off with the DTH sector.

DTH‘s taxation, cross-media and other issues

The DTH sector has seen explosive subscriber growth amid losses, low ARPUs (average revenue per user) and too many players. They have built high-quality infrastructure and their parent companies have deep pockets.

So will the floodgates open for the DTH companies? Or are there policy hurdles that will stymie foreign investments?

"Unless there is profitability, who will come to invest substantially? The DTH sector is heavily penalised with taxes. We have to pay vey high entertainment taxes to the state governments, licence fee and service tax. Just increasing the FDI cap will not solve the problem. Taxes need to be streamlined. A holistic approach has to be taken," says Goel.

Goel explains the dilemma citing the example of his own company. "Our investors are happy with the management and performance of the company. But they are not happy about the industry‘s structural issues. How can they be? For DTH companies, almost 50 per cent of the revenues goes by way of government levies," he elaborates.

The profitability of the sector is also distorted by low ARPUs. For the first quarter of the current fiscal, Dish TV‘s ARPUs stood at Rs 156 while Airtel digital TV was at Rs 166. Tata Sky‘s ARPUs are higher than these two DTH service providers but not by a great distance. The reality is that while DTH has grown subscribers at a healthy pace over the last few years, ARPUs have crawled.

Shankar, however, does not think that low ARPUs will be a deterrent for investors. "There have been a few reckless players who have spoilt the market. But sanity is returning. Besides, there have been a few serious drives in recent quarters to lift ARPUs up. HD services is also another route to improve ARPUs. The industry‘s problem is taxation," he avers.

Shankar believes cross-media ownership will be a stumbling block. "Global strategic investors will look at this issue carefully. If cross-media ownership is lifted, the sector will look much more attractive," he says.

How the DTH companies are poised individually to tap the FDI opportunity

The promoters of Dish TV, India‘s largest DTH company by subscribers, will not want to cede majority ownership. For the only listed DTH company in India, the headroom for offloading a major stake is, thus, limited as the promoter holding in the company is 64.75 per cent as on 30 June 2012. US-based private equity firm Apollo Management already owns 11 per cent of Dish TV.

The company has got the nod to raise $200 million but does not need external funding as it is operationally cash positive.

News Corp is restricted by cross-media ownership to up its stake in Tata Sky where it holds 29.8 per cent. Tata Sons is the majority partner while private equity firm Temasek holds 10 per cent.

"There is no logic for the government to hold on to the cross-media restrictions. While some companies have by-passed the cross-media restrictions, we have stuck to it. Cross-media restrictions will be a hurdle for attracting strategic investors into this sector," says Shankar.

Will financial investors step in first so that they can sell to strategic investors later on?

"Only if global strategic investors come in will financial investors look into the sector more aggressively," says Shankar.

Kalanithi Maran-promoted Sun Direct has a a strong base in the southern markets. However, joint venture partner Astro has been dragged into controversies in India. The parent of the Malaysian company has made several investments in India, including telecom, through its different arms. Allegations have been made about Kalanithi‘s brother and former telecom minister Dayanidhi Maran taking kickbacks from the Astro group in the Aircel-Maxus deal. The CBI started investigating into the possible linkages between the purchase of Aircel by Maxus (Astro group company) and the equity participation of Astro in Sun Direct.

Reliance Big TV, part of the Anil Dhirubhai Ambani Group, has been looking for an investor for long but has been unable to conclude anything. "It will want to dilute stake in the current environment. There are many entities within the Group that need heavy investments," says an analyst who tracks ADAG companies.

Videocon and Airtel digital TV are the other two private DTH companies where foreign investors can possibly step in. Airtel digital TV has seen strong growth in subscribers and its ARPUs have been better than many of the other DTH players.

Videocon is, perhaps, the fastest growing DTH company in terms of subscribers for over a year.

So is Videocon looking at roping in an investor? "Videocon is well funded by the promoters to take care of digitisation. It has been the fastest growing DTH company in the last 6 consecutive quarters and would look at maintain the same going forward. Additionally we are always looking at different partnership models (equity based or non equity based) for strengthening our position in the market," says Videocon d2h director Saurav Dhoot.

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