Reliance Industries Ltd (RIL) and Walt Disney Co. are finalising details of a non-binding term sheet to move ahead with plans to merge their India media and entertainment operations, said executives involved in the matter. The deal is likely to give the Mukesh Ambani-led group a controlling stake in what will become the country’s largest media and entertainment business if the deal goes through.
The plan, as of now, is to create a step-down subsidiary of RIL’s Viacom18, which will absorb Star India via a stock swap, said the people cited above. Reliance is pitching to be the larger shareholder with at least 51% in the merged company with Disney owning the residual 49%, they said. Both businesses are being treated as similar-sized ones, so RIL is likely to pay cash for the controlling stake.
The two sides are also negotiating a business plan to inject cash as immediate capital investment, expected to be $1-1.5 billion. The final shareholding structure of the entity will get crystallised and its value established based on the cash infusion from each of the parties.
The board is expected to have equal representation from Reliance and Disney of at least two directors each. Uday Shankar-led Bodhi Tree, the second largest shareholder in Viacom18 after Reliance with a 15.97% stake, is likely to get a seat. A minimum of two independent directors are being considered. This may change in the weeks ahead, said the people cited above.
Those involved in the talks from the US company include Justin Warbrooke, CFO, direct-to-consumer business, and international head of business operations, and Kevin Mayer, a former Disney executive brought back in July by chief executive Bob Iger as an adviser to help him navigate the company’s legacy television business and the ESPN sports network. Another participant is K Madhavan, Disney’s India head, along with The Raine Group, an advisory, said the people cited above. Warbrooke was in India recently.
Manoj Modi, Ambani’s key adviser, is fronting negotiations for RIL, with the group’s M&A team.
The two sides are likely to have key meetings before signing the term sheet, following which both are expected to go for an accelerated timeline to announce the merger, possibly as early as end-January, said the people cited above.
After the term sheet is decided and confirmatory due diligence is conducted, the valuation exercise will officially begin with independent valuers.
“It’s a merger not an acquisition but not with equal shareholding,” said one of the persons cited above. “Both sides will put equity instead of one buying the other out for cash. Even the junior shareholder will have rights.”
Reliance Industries spokesperson did not respond to ET’s detailed questionnaire sent on Monday afternoon till press time. Walt Disney India declined to comment.
The US company is also expected to provide the joint venture company a five-year licence for exclusive subscription video on demand (SVOD) content for Disney+ originals and its library content.
A five-year lock-in, except in the case of an IPO of the merged company, is also expected to be agreed upon. Distribution channels and Jio Platforms are also to be made available to the joint venture on mutually agreed terms. A list of competitors with which any engagement is to be barred will be drawn up.
Upon signing the term sheet, there is likely to be a 45-60 day exclusivity that can be mutually extended.
Walt Disney CEO Iger said on an earnings call in November that the company was “considering options” but that it would like to stay on in India and try and “strengthen our hand, improve the bottom line”.
As per US media sector analysts at Barclays, one way to manage Disney’s cost base without standalone cuts could be to extract synergies out of transactions with other companies.
This could be “a significant immediate opportunity in the company’s largest international segment, Star India. This business appears to be running at breakeven ebitda on ~$2 billion of annual revenues because of factors unique to the market”, said Kannan Venkateshwar and Siyuan Huang in their recent report. “The company would benefit significantly if it is able to combine Star with Reliance Jio’s local media business… This could result in significant cost and revenue synergies and could transform the value of this business longer term.”
Viacom18, which also has TV18 and Paramount as shareholders, saw its FY23 net profit slump 98% to Rs 11 crore while revenue from operations rose 10% to Rs 4,554 crore. The company’s expenses increased 33% to Rs 4,586 crore.
Walt Disney-owned Star India’s consolidated net profit for FY23 dropped 31% to Rs 1,272 crore from Rs 1,834 crore in the previous fiscal year, according to its filing with the Registrar of Companies (RoC). While the company’s operating revenue from the TV and digital businesses rose 6% to Rs 19,857 crore, total income increased 9% to Rs 20,699 crore, making it the largest traditional media and entertainment company in the country by revenue.
Novi Digital Entertainment, the subsidiary that owns Disney+ Hotstar, has seen its net loss more than double to Rs 748 crore, while revenue rose 35% to Rs 4,341 crore. Novi is in the process of merging with its parent company, Star, which holds a 78.07% stake in it.
Source: Economic Times