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Report on Shemaroo

Smart Buy: Making of the Sony-Sab deal

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Being out of action for a long time is not SET India chief executive officer Kunal Dasgupta‘s style. In 2004, he had quietly watched Star India launch Utsav as a flanking channel while preparations were on to introduce Star One for upscale audiences.

Then he decided to strike. Towards the middle of last year, he called Sri Adhikari Brothers Television Network Ltd (SABTNL) vice chairman and managing director Markand Adhikari to Sony India‘s office in Mumbai‘s western suburb of Andheri for a long discussion. His interest: to buy out Sab TV, a niche comedy channel.

Just the kind of talk that Adhikari wanted to hear as at that time it had been nigh on four years that he had been scouting for a strategic investor. Exploratory talks he had initiated with Sony, Zee Telefilms and Star India during this period had thus far proved futile.

"The meeting was progressive. Both agreed to pursue the talks," says a source familiar with the deal.

To be honest, Dasgupta was not totally convinced that buying Sab TV would be the right step. He believed flanking channels wouldn‘t work in India‘s current environment. Zee‘s El TV hadn‘t; neither had Star‘s Utsav. Doubts in mind, he took the debate to SET India chief operating officer NP Singh.

NOT A FLANKING CHANNEL, A GROWTH OPPORTUNITY

Assurances came from Singh and both agreed that Sab TV should not be seen as a flanking channel but as an independent growth opportunity. A humour-centric channel with a male skew audience base that would widen Sony‘s bouquet, which already had AXN to tap English-speaking (or more pertinently thinking) male audiences.

At the early stages of discussions itself, both companies realised that the deal would fit in with their future strategies. Says Singh, "Sony TV is seen as a female and family-focussed channel. With Sab TV, we will get a male-skewed audience in the Hindi heartland. This would broadbase our offerings as Sab TV would bring in new audiences to the network. We decided to push the deal forward."

This suited Adhikari as well. He wanted to start a Marathi and a current affairs and news channel. Freeing himself from Sab TV was essential as it was pulling down the profitability of SABTNL, a listed company. Net profit slumped from Rs 85.40 million for the fiscal ended 31 March 2002 to Rs 16.30 million in the year ended 30 September 2004 (financial year for SABTNL is now ended 30 September).

And in any case Adhikari had been preparing the ground for an investor to step in. On 31 May 2004, he officially declared that the broadcasting division of SABTNL would be transferred to a subsidiary company. The market reacted favourably and the scrip which was lying low at Rs 50, jumped to Rs 70 levels in June, before starting to slide back.

"The market was expecting something to happen, but we felt it was still all in the air," says a senior executive in a brokering firm.

TALKS INITIALLY STALL ON VALUATION

Sony and SABTNL were locked in negotiations, but Adhikari was contesting on valuation. He was also more interested in Sony picking up equity in Sab TV as it would add value to the company and the stock would get a big boost. But Sony was clear: it wasn‘t prepared to take a part stake participation. "We were convinced right from the start that if we are to do a deal, it had to be a total buy out," says Singh.

Adhikari quickly understood that: to get a suitable suitor, he had very little choice left. Star had already started Utsav, a free-to-air channel run with old content, while Zee Telefilms had a wide spectrum of channels to address different audience segments. Smile TV from Zee stable, in fact, was positioned directly against Sab TV. "He was now willing to sell out Sab TV, something which he didn‘t want to do a couple of years back," says a source close to the company.

The news first leaked on 2 September that Sony was in an advanced stage of negotiations with SABTNL to acquire a majority stake in SAB TV. And on 28 September, SET and SABTNL entered into an understanding: Sony will have the exclusive option to distribute Sab TV as part of the One Alliance bouquet and to acquire an equity stake in the broadcasting subsidiary.

Hearing this, the market responded with the scrip jumping from Rs 70 to a high of Rs 115 during the September-January period. The expectation was that Sony would pick up stake in Sab TV or even do what Star had done with Balaji Telefilms: a vertical integration deal with the content production company. Only in this case, the content company had a broadcasting subsidiary arm as well.

"The anticipation was that Sony would pick up a 51 per cent stake in Sab TV," says a market analyst.

That was nowhere near the truth. But Sony was not worried about the value of the scrip going up as it was negotiating to buy out only the hived off arm of SABTNL. And with the signing of the memorandum of understanding (MoU), it had blocked off other suitors.

Clearly, the deal was on. Sony had appointed consulting firm KPMG to carry out a due diligence. "KPMG did the initial due diligence. But we drove the deal ourselves," says Singh.

Adhikari initially wanted Sab TV to form part of the distribution of One Alliance while pursuing the talks for stake acquisition. But Sony made it clear that could happen only after the deal was struck. "He wanted to convert it into a pay channel and bring it under the One Alliance bouquet. But we were convinced that we would bring it under the One Alliance fold only after acquiring it," says a source in SET India.

Valuation was still to be agreed upon. Adhikari, according to market speculation, was asking for a Rs 1.75 billion valuation on the strength of the brand and the unique positioning of the channel. Sony ruled that out, making it clear that it would get into the deal at a much lower cost. Neither companies, however, were willing to talk about it.

So what made Adhikari arrive at a settled price? Sony sweetened the offer by including a content supply contract. Adhikari started negotiating for a long term deal which would assure business for his content company.

In January, the clouds had almost all disappeared. That is when Adhikari announced the launch of a slew of nine shows on Sab TV. "We were very close to the deal at that stage. We had got the internal clearance from the board. Only the document processing work had to be closed," says Singh.

And then on 14 March came the big news: that the Sab TV brand and 1305 hours of library programmes (representing 20 per cent of over 6500 hours of library strength) and related assets were being transferred to SET against a total consideration of $13 million (Rs 570 million). SABTNL would also execute a programming agreement with SET India for content supply worth Rs 750 million over a span of five years.

"The content supply contract was part of the complete package that we offered. It made sense for us as we wanted to ensure that the continuity of the channel was maintained," says Singh.

What made a conservative company like Sony Group act so fast? In one word, distribution. The second bouquet of SET-Discovery‘s One Alliance comprising channels like MTV, Nick, Animax, Discovery Travel & Living, and NDTV needed a push up. "Distribution was a big reason for acquiring Sab TV. But we also see potential in growing the channel‘s advertising revenues," says Singh.

Though Sony executives would not admit it, a prime driver for clearing the deal was also the price at which Sab TV was acquired. Launching a new channel would invite not only content issues but also the cost and difficulty of getting it distributed.

SONY‘S SWEETENER FOR ADHIKARI - CONTENT SUPPLY CONTRACT

For Adhikari, the bait was a supply content contract of Rs 750 million. This would mean an assured business for five years. Besides, he could focus on getting content across Doordarshan and other private satellite broadcasters, as a build up from the platform provided by SET India.

Sony‘s immediate challenge is to grow in more audiences for Sab TV. Already showing movies on weekends, Sony plans to position Sab TV as a "humour and light entertainment" channel without deviating from its male skew audience base. Reality and game shows are also being lined up, though a complete fix on the channel‘s programming will be finalised in the next few months.

"We will have a variety of entertainment shows. Our initial programming focus will be on the 8-10 pm band. Gradually, we will expand it to 11 pm," says Singh.

Sab TV will soon have a business head to pump up the channel. The channel has already shifted to PanAmSat 10 and is being offered as part of One Alliance‘s second pay bouquet. Says SET India executive vice president of ad sales and revenue management Rohit Gupta: "We have set ourselves aggressive targets. We will leverage the network strength to make sure that we realise the full revenue potential of the channel."

Having taken full control of Sab TV, it will now be the task of SET India to make a success of it. "When we did the valuation and acquired Sab TV, we looked at it from a 3-5 year perspective. We will make the right investments to make it work," says Singh.

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