Television

'We expect valuations to go up, there will be cash available to build the market' : Simon Dewhurst - CLSA's media and entertainment investment banking head

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When it comes to India, CLSA's media and entertainment investment banking head Simon Dewhurst has a pretty good handle on the dynamics at work in the broadcast sector. After all, he's far more than your average number crunching suit. Six years at Star, a part of which was spent as head of Channel [V], means he has had first-hand experience of business from the broadcaster's perspective.

In Asia, where he has spent more than ten years, Dewhurst has executed a broad range of equity capital markets, merger and acquisitions, and financial advisory transactions for several media and entertainment companies. He started his career in the global media and entertainment practice at Arthur Andersen, based in London and Hong Kong.

CLSA has interest in India and, in the media sector, was financial advisor to Zee Telefilm's $100 million FCCB (Foreign Currency Convertible Bond). It is a leading brokerage, investment banking and private equity group in the Asia-Pacific markets.

Indiantelevision.com caught up with Dewhurst at the first India Television Summit - organised by indiantelevision.com and Media Partners Asia in Mumbai in end Septemberto - find out his views on what is spurring investments into India and how the media stocks are positioned in this. In an interview with Sibabrata Das, he says the broadcast sector is exciting and the established players have credibility. There will also be interest in the cable companies but the current form where there are too many leakages in the system has to change.

Excerpts:

Foreign investors are bullish about India as is evident from the massive inflow of funds into the stock market. Does this extend to media companies as well?



With such high returns, India is very attractive. Investors interested in India are looking at those companies which have a strong domestic focus. The media industry has such a focus. But there is a fundamental problem in the distribution side of the television business. Investors would want this to be sorted out.

What then is their perception of the TV media business in India?



There are two clear camps in the TV industry here. The relationship between the broadcasting and cable TV distribution companies is anything but cordial. Growth, though, is taking place. The advertising market and the TV penetration rates will continue to grow as it did in the last decade. The lamp is bright because new channels are being launched. But if it gets too crowded, the risk will be for the new entrants who are copying the existing channels.

Is valuation of broadcasting companies being pulled down by the negatives of distribution?



The broadcasting channels would have an awful lot more value if the distribution business was better. There is talk of only 13 per cent subscription money going back to the broadcasters. Obviously, if this climbs to 40 per cent, broadcasting companies will become more profitable.

So investors see prospects in broadcasting companies?



In strong broadcast business, you will get cash into work. NDTV, TV18 and TV Today, for instance, are pure TV channel players with established and strong distribution base to attract investors. Zee Telefilms is another interesting media company. Even content companies like Balaji Telefilms, with strong focus, have growth opportunities. Balaji can also look at other means of development and growth like getting into animation and kids content. We expect valuations to go up. There will be cash available to build this market.

Do you think Star and Sony Entertainment Television India will list in this market?



Broadcasting companies like Star and Sony Entertainment are today reaping rewards for investments and risks which they have taken over a decade. They have a proven business model. I don't think Star will list - at least there is no compulsion. Sony will as there are some Indian investors who would want to capitalise on their investments. The compulsion for Sony is definitely different. But if these two biggies list, it will be good for the media stocks and we will have big valuations at play.

'Broadcast business has scalable opportunity. And there is scope to expand market leadership'

How are cable companies positioned?



There will be interest in the cable companies but not in the current form where too many leakages are existing in the system. Siticable, for instance, is an intermediary with a majority of the households served through local operators. The joint venture partners have an awful lot of vested interests. Other MSOs in India like Hathway Cable & Datacom have a similar structure with the last mile operators possessing the customers. That doesn't make a recipe for equity investment or debt structure. If you don't control the commercial relationship with a household, it is hard to find a business model. There is no faith that tomorrow is going to be better than today. The status quo has ruled the last mile operator and household for the last decade. I don't think that can change fundamentally. That is why it won't attract capital from third parties.

Why then did Rupert Murdoch acquire a stake in Hathway and Intel take a small stake in Incablenet? The environment was similar then as well?



The vertical model has worked for News Corp. Murdoch thought it would work if he had an interest in both broadcasting and distribution businesses. There could have been strategic reasons. But he has not stepped up the investments or taken a stake in other cable companies. He, perhaps, didn't like what he experienced.

Can cable companies have access to debt in the current business model?



In cable companies, debt has a significant part to play. But that will require considerable consolidation in the last mile. And there are different ways you can get to the household -direct-to-home (DTH), licensing spectrum and broadband infrastructure, for instance. In the US, cable companies like Comcast are run as modern organisations. They are listed, have access to capital, and follow strict corporate governance. The strategic thinking that goes on in these organisations can be compared with the Fortune 500 companies. But in India the cable operators have a totally different mentality and function more as rent collectors. They will squabble, not pay tax, and under-report. And why do they think they should enjoy this privilege? Because they have survived the turf wars. That is the fabric of the last mile operation in this market. The local cablewallahs do not want to take risks or make those tough business decisions. The MSOs, on the other hand, are distant from the customers. They flap their wings and question why they exist. They have failed to homogenise the cable industry. When they got into the business, they thought that would happen as it has in many other markets like Taiwan.

How do Indian media companies compare with China?



The listed China media stocks trade on forward PE (price earning) multiples higher than in India. But it will be unfair to compare as they are different kinds of stocks in different markets. It is the Internet stocks that are listed in China and they operate in a market which has 1.3 billion consumers of which over 100 million have Internet with high broadband connections. But Indian media companies are also exciting and the established players have credibility.

Do you see Indian media companies tapping foreign markets?



There are options of raising FCCBs (Foreign Currency Convertible Bonds) or GDRs (Global Depository Receipts). Though the market is thinking FCCBs are better than GDRs, we think the opposite. There is a cost attached to FCCBs. If you can do a GDR properly, you can get a price comparable to what a FCCB gets. And the advantage that you have is that you can actively market the full issue to high quality long holding investors.



'In cable companies, debt has a significant part to play. But that will require considerable consolidation in the last mile '

Why then did CLSA advise Zee Telefilms for an FCCB?



We acted as financial advisors to Zee on this issue. But Zee needed to raise money and they couldn't do an ADR (American Depository Receipts) or GDR. They had to pay a high interest on their debt. With market conditions and borrowing rates down, it was the right thing for them to do that. Zee is the largest media stock listed here. I recommend a buy for Zee at this stage and believe its stock price would further go up.



Do you think print media companies offer better valuations than the TV companies?



Broadcast business has scalable opportunities and there is scope to expand market leadership. Newspaper business is confronted with a tough competitive environment among the bigger players. But in the long term I am bullish about the newspaper industry. There is an opportunity for consolidation and growth.

Do you think print media companies offer better valuations than the TV companies?



Broadcast business has scalable opportunities and there is scope to expand market leadership. Newspaper business is confronted with a tough competitive environment among the bigger players. But in the long term I am bullish about the newspaper industry. There is an opportunity for consolidation and growth.

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