Television

'JV with Disney has possibility to grow all our businesses' : Ronnie Screwvalay - UTV founder and CEO

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UTV founder-promoter Ronnie Screwvala has shown again and again that he is a smart dealmaker. He got a string of private equity funds and News Corp. to invest in his TV content company which had successfully expanded into a diversified media model.

But nothing can get him more excited than the latest deal he cut out with Walt Disney. The buyout of Hungama TV ($30.5 million) and a 14.9 per cent stake in UTV ($14 million) has given him the potential to build a war chest of Rs 5 billion. "In media, that offers lots of opportunities," he says.

Screwvala can now take fresh risks as he aims at sizing up UTV to a Rs 10 billion company by 2010. His first goalpost: Rs 5 billion by 2008.

He feels he has come a step closer to his goal. "If I don't take risks, what is the use of being in this game? I need to be in control of my destiny. And I need an international surge," he says.

On Screwvala's expansion plate is not just movies and animation but also new media content including gaming. The fun, as he says, is playing in a bigger field.

In an interview with Indiantelevision.com's Sibabrata Das, Screwvala talks of the business model he has carved out for UTV's second phase of growth and the script his company plans to write with Walt Disney.

Excerpts:

How did the talks with Walt Disney initiate?

Walt Disney international president Andy Bird gave me a call as he had heard that we were looking at a strategic investor. He asked if we could meet in a couple of days. Little did he know that I was in L.A. at that time. I went over and we started the discussions.

What did Disney have in mind?

They wanted to buy out Hungama TV as it would overnight make them the No. 1 network in the country. And by picking up a stake in UTV, they also wanted to participate in our diversified businesses.

Why were you looking at an investor after Astro had agreed to buy a 26.01 per cent stake in Hungama TV for $7 million?

Our internal strategic team was evaluating on how we could take UTV from a Rs 2 billion to a Rs 5 billion company by 2008 and Rs 10 billion by 2010. We realised that we had to be at the top end of the value chain in all our businesses and we needed to be in control of our destiny. There were three things we had to do: get a strong international surge which would give us a fillip; grow vertically in some of our businesses; and foray into one or two key areas. We felt we would be better off with a strategic rather than a financial investor. We found our talks with Walt Disney particularly interesting as India was a high interest and priority area of growth for them.

'With the agenda of scaling up, UTV shouldn't be seen as a quarter-on-quarter company'

So what made you exit from Hungama TV when the kids channel had established its base among audiences in a short span of time?

We had not put Hungama up for sale. We were looking at a strategic investor in UTV with no thought process of exiting Hungama TV. If anybody had come with an outright purchase deal of the channel, our answer would have been a flat no. But when we started discussions with Disney, we realised that we couldn't proceed without resolving the Hungama issue as they were in the kids space. We couldn't have partnered with them in all areas while competing in one. The nature of this deal as it evolved made us evaluate afresh. We were getting into a much larger joint venture with Disney. For us, the kids space meant TV content, movies, animation and Hungama TV. In our overall association with Disney, we felt we could grow in all these environments except the last. While we were letting go of one of our assets, we would be inheriting a huge JV possibility to grow all our businesses.

Did Disney make an investment in UTV because you wouldn't have otherwise parted with Hungama TV which they needed for strategic reasons to expand their TV business in India?

Walt Disney was clear from the beginning that they didn't want to just acquire a winning asset but would like to also build a long term relationship with the Group. Because there was clarity from both sides and an eagerness to go forward, the deal could be consummated in just three months. It is not Disney's habit to make minority investments; the very fact that they did, is because they believed they could genuinely grow the business.

How will the Disney deal help you leverage the company for scaling up?

We will have a cash reserve of Rs 2.36 billion between the sale of Hungama TV, fresh equity to UTV, and my warrants. We can leverage the company with a 1:1 debt-equity ratio and have a Rs 5 billion war chest. In media, that offers lots of opportunities.

What are the growth opportunities Disney will throw up and when will this script begin?

We are looking at animation, movies, TV and gaming. On the movies front, we are exploring possibilities of co-producing Hindi films with them as well as going mainline with English. Home video is another area we are looking at to expand our Indian movies overseas through their strong retail network. Just one big co-production deal with Disney will enable us to possibly build more revenues than Hungama would have done. As it is still early days for the channel, it never formed a major chunk of our revenue mix.

Hungama's monthly cash burn was around Rs 13 million. Was this a matter of concern for you?

The burn rate was reducing with an increase in advertising revenues. The average monthly burn had come down to Rs 5-7 million.

Were investors still disturbed with this?

Most of our investors kept telling us that we are happy with your business, but Hungama is guzzling a lot of money. That is a short term view to have. In media business, not everything is a profit and loss situation. There are many aspects of your business where you are building value for the future, far in excess of your profit and loss calculations.

So were you under pressure from investors?

Investors also valued us for exercising the broadcasting opportunity and were willing to give Hungama TV the time. They were happy with the progress on an ongoing basis - and we were continuously proving ourselves.

What made Hungama click in a highly competitive environment where it was up against established multinational brands?

Localisation of content worked. Then we started cornering original animation content which was available in the open market. Pokemon and Beyblade are, after all, Japanese animation content acquired by Cartoon Network. We also did three aggressive on-ground events (Captain's Hunt, Telethon and talent hunt) that were highly successful.

When you conceived Hungama TV, where did you see you could carve a space outside the big global kids channels?

The day Shakalaka Boom Boom got 8 TRPs on Star Plus in the 7 pm slot, we knew local content would work. That was our wake up call. We realised that kids in India did not have content for kids; they were watching soaps, horror shows, etc. We started airing Shakalaka Boom Boom and that is how the syndication model in this country arrived. The channel had a connect base, enjoyed viewership and had established a brand among kids in just over 22 months to fetch us fair value as Disney paid $30.5 million (about Rs 1.4 billion) for it.

Post Hungama, how is UTV poised for its second phase of growth?

Our growth is going to come from movies, animation, monetisation of our international opportunities, and mergers and acquisitions. We also expect our airtime sales to zoom. And incremental growth is going to come from TV content business.

What will the movie pipeline look like?

We plan to have an annual pipeline of 12 movies, one or two international co-productions and possibly an animation film. We have already lined up three movies with Rakeysh Mehra. We are making Ashutosh Gowarikar's next movie and three films with other directors. We have also tied up with Vishal Bhardwaj. And all these are big movies.

Have you lined up international co-productions?

We see ourselves scaling up on international co-productions a lot. We will be announcing three such deals with big studios and star cast in the next 45 days. While Fox will be involved in one venture, the other two will be with different studios. And these are two-way partnership deals. For Mira Nair-directed The Namesake, we were involved in a three-member venture with Fox Searchlight Pictures, Entertainment Farm and UTV contributing equally in the $9.6 million project.

Will UTV also be aggressive on the film distribution business?

The film business will be production-led. We do not have an aggressive distribution agenda at the moment. We will, of course, be distributing all the movies that we produce. But on the acquisition front, we may just do one or two movies for distribution.

Are you planning to produce regional films?

We are looking at Tamil and Telugu and are evaluating proposals. We expect that space to grow, though right now there is not much of an international market for them.

'We plan to produce Tamil and Telugu movies'

How significant will the movie component be in the revenue mix of UTV and what is the de-risking system you are adopting?

We will scale up hugely but we expect to keep it under 50 per cent of our revenue mix as other segments will also be growing. We expect air time sales, for instance, to grow substantially. In terms of exposure and risk, it will depend on our ability to churn out movies. And when you are doing a wide basket of films, the risk gets limited as you get scale built into economics of cost and exploitation. It is a tight rope that one has got to walk to make that business model work.

For the last fiscal, UTV posted a revenue growth of 18 per cent but the bottomline was hit. Going forward, will the pressure on margins continue?

Clearly with the agenda that we have set ourselves, we are not a quarter-on-quarter company at this point of time. We are going to make serious investments into the business because we are scaling up. We can't take short term decisions.

 
What does that imply?

Let's take the movie business of exploitation, for instance. We want to keep all the rights rather than part with them for a longer period, because we will get more value in future. That is what we want to build. That doesn't necessarily mean that our margins will be under pressure. It just means that we are not going to put ourselves under pressure to make any short term decisions that has any long term implications because we have reached a certain critical stage. We now also have a good cash reserve to follow this model.
 
Are you on a weaker wicket on the TV content production segment?

We should be given credit for what we have got right rather than where we went wrong. We have got stability in a business that is so erratic that most production houses have been badly hit. TV content is a good business for us because that is what we have grown up with. But we are not at the top end of the value chain and not in control of our destiny. Even if you come up with a good product, there may be a cycle in the life of a broadcaster, the channel may not be doing well, the slot may not be working - or they may be wanting to do things differently. We must also not forget that we have continuously maintained our No. 2 position for the last so many years. We will see incremental growth in this segment. Being a pure TV content or movie player is an almost impossible model to succeed with, if you want to be a company of great size. The fact is that we have a mix of multiple revenue models, given the fact that nothing is so hugely scalable.
 
You were never bullish on the animation sector. Has that stance now changed?
We are more aggressive if not bullish because we have a good order book in outsourcing and are also involved in originating content. We invested Rs 100 million last fiscal in setting up the infrastructure and have a 225-seater facility in 3D animation. We are having a pipeline across the value chain and have project orders worth $18-20 million.
 
Are you eyeing acquisitions to make an entry into gaming?

We are planning to enter into gaming as an extension of our businesses in animation, post production and special effects. We are eyeing acquisitions of domestic and overseas gaming companies. There is a model for international companies to look at India as an outsourcing centre and an Indian story for going overseas. We are spending a lot of time evaluating the gaming business.
 
Do you see scope for acquisitions in the movie business as well?

There are no companies with movie libraries or franchisees which will allow you to develop sequel properties. No such model is available in India at the moment. We don't see scope for inorganic growth in this area.
 
Will UTV see a substantial jump in topline this fiscal?

We are expecting a 25-30 per cent growth in topline for FY07. But the big jump will come over the next two years. We have now started playing in a bigger field.

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