Reliance (RIL) Acquires Network

18
(2014- July)
M&A Mid Term Review

Context
Reliance Industries Ltd.
Mukesh Ambani Chairman and MD
Oil and gas; petroleum refining;
petrochemicals. Operates directly,
subsidiaries and joint ventures
(collectively referred to as the
Reliance Group)
Deal was beneficial to RJIL which
could access Network18 s digital
content

Network 18

Founded by Raghav Bahl in 1993,

went public in 2006
Digital, publishing and ecommerce assets including
moneycontrol, ibnlive,
HomeShop18 and bookmyshow ;
TV18 - subsidiary
Debt issues in 2011 Rs.1400
crore

The trigger
Sometime in early March, Sardesai had got a call from Ambani, who was livid.

TIMELINE
2006

2008

Network18 initiated an aggressive acquisition strategy(diverse sectors- media and

entertainment business, ranging from general
entertainment channels to movie
production, e-commerce, consumer led print magazines (Forbes India), website for stock
markets (moneycontrol.com) )
Strategy did not reap benefits at the pace of the expansion

2008 - RIL bailed out Eenadu Group Owned BY Ramoji Rao

Showed RILs interest in the media sector and the synergies between media and telecom

2011 Network 18s consolidated loans > INR 25 billion; while the overall revenues = INR 16
billion
2011, cash cow- news television business under pressure due to economic downturn ;
advertising revenue had dried up
Late 2011: CEO, network 18 : Haresh Chawla: reasoned with Bahl to raise money through
divesting a stake in entertainment business to Viacom 18. After Bahl refused, Chawla quit the
company.

2011

2012

January :Mukesh Ambani bails out Network 18, buying out Raos ETV
Access to exclusive content across segments for Reliance to foray into 4G services for
RJIL

201314

2013-14 - The financials of Network18 Group improved. The consolidated losses reduced
from INR 1050 million in 2012-13 to INR 367.7 million in 2013-14; restructuring ; layoffs and
selling unprofitable business

2014

28th may : Network 18 Chief Executive Officer B. Sai Kumar and Chief Operating Officer Ajay
Chacko put in their papers.
29th may : RIL buys network 18 in a ZOCD deal

Market Reaction

Network 18 share Price

Reliance Share Price

1200
1000

80
70
60

800
600
400

50
40
30
20

200
0

Share Prices remained more or less constant,

the price fluctuation was 1% on both sides,
hence the deal did not impact the share price

10
0

Share Prices increased by 20% the Next Day

And subsequently 5%, 10% , 10% in the next
three days

2012 - ZOCD
convertible within
10 years
Raised 4000 cr rights
issue

Repay Debt

Network 18
78%

Buy RILs holding

in ETV

TV 18
9%

Repay the
debt

Trust

2014 Converted
ZOCD and
acquired
majority
stake

RIL

Special
vehicle

NATURE OF THE
TRANSACTION
Independent Media

STRATEGIC FIT
Synergy between Network18 and
Reliances 4G play in the telecom business
through Reliance Jio Infocomm .They
needed a content factory of enormous
scale. It was a unique amalgamation at
the intersect of telecom, Web and digital
commerce via a suite of premier digital
properties.
To put it simply, with 100% control, RIL
now has access to all the content put out
by the Network18 Group. This includes
in.com, IBNlive.com, Moneycontrol.com,
Firstpost.com, Cricketnext,
bookmyshow.com and TV channels such
as Colors, CNBC TV18, CNN-IBN, IBN7 and
CNBC Awaaz
One such instance can be ofUS telco
firm AT&T buying Direct TV.

At the same time, a turn of events:

Gas Pricing Issue : In order to get a
grip over the whole gas pricing affair (FIR over
alleged irregularities in the pricing of natural
gas from the KG- basin ) Reliance wanted to
ensure that nothing goes against them in the
gas pricing issue
Nira Radia Tapes : A conversation
between corporate lobbyist Nira Radia and a
journalist, taped by income tax investigators
accusations about crony capitalism
Complete control over one of the largest
media companies in the country, with a
presence across television, print and digital,
helps to put across ones point of view.

How did the merger proceed

IMT made Rs.9.96 billion
investment into
Network18 through
ZOCDs(>51% stake if
converted)

IMT offered open offer to

public share holders of
Network18 and Tv18 and
InfoMedia

Reconstituted the
Board by replacing
with acquirer
nominees

DCPL became the trustee

of IMT and no change of
control in Network18

IMT acquired controlling

stake in
Network18(71.25%) and
TV18(55.03%) and
Infomedia(47.6%)

DCPL was
removed as the
trustee of IMT

In May 2014 Reliance

takeover bid to Network18

IMT and RBHPL entered

into SPA in May29
(100%)

Issues in Merger
There were no issues raised by promoters of RBHPL
because
ZOCDs were not converted instead stake was bought from
Raghav and Ritu Bhal
It was considered a friendly takeover
Raghav and Ritu got out with cash instead of stake dilution if
ZOCDs were convereted
CCI concluded that it was unlikely that the proposed
combination would have any adverse effect on competition in
India

Stakeholder Reactions
CCI
The CCI started monitoring the
transactions right from the time
RIL subscribed to ZOCDs of
Holding Companies of Network
18. However the CCI concluded
that the proposed combination
would not have any adverse
effect on competition in the
industry

Consumers
Media consumers and other
media houses viewed the deal
with suspicion as they were of
the view that Reliance would be
able to influence media opinion
about its business practices and
deals as Network 18 was one of
the largest media conglomerates
in India with a reach across all
channels

Employees
There hadnt been any significant
disapproval from employees as
Raghav Bahl had already started
restructuring and laying off in
2011. It was unlikely that more
employees would be laid off as
the bottom line position pf the
group had significantly improved

Target Company Management

Promoters Raghav Bahl and Ritu
Kapur had accepted the offer
made by Reliance and had
communicated the same to the
BODs of the companies being
acquired. As a result the deal
went through within less than 2
months

Deal Structuring

Acquisition vehicle

Post-closing
organization

Legal form of
selling entity

Form of payment

Accounting
Considerations

Form of acquisition

Tax considerations

Deal Structuring
Acquisition vehicle
IMT was set up pursuant to
a trust deed dated
November 2, 2011 (Trust
Deed) for the purpose
of making investments.
RIL is the sole beneficiary
of IMT as per the Trust
Deed. RIIHL, a wholly
owned subsidiary of RIL,
was appointed as the
Protector2 of IMT
The board of trustees
administers and manages
the affairs of IMT in
accordance with the Trust
Deed. All decisions of the
board of trustees are taken
by way of majority vote of
the trustees. The
maximum number of

Form of payment
Open Offer:
22,99,46,996 equity shares
of Network18 at a price of
INR 41.04 per share,
aggregating to INR 9,437
million (USD 157.28 million);
44,65,10,110 equity shares
of TV18 at a price of INR
30.18 per share, aggregating
to INR 1,3475 million (USD
224.58 million);

Form of payment
Indirect Acquisition:
The consideration for the
acquisition of the Holding
Companies was
approximately INR 32.2
billion (USD 536 million),
attributable as follows:

74,61,88,987 equity shares

of Network18 at a price of
INR 41.04 per share
aggregating to INR 30620
million (USD 510.33 million);

1,30,62,224 equity shares of

Infomedia at a price of INR 3 6,77,33,486 equity shares of
per share, aggregating to INR TV18 at a price of INR 30.18
39.18 million (USD 653,333). per share aggregating to INR
2040 million (USD 34
million).

Form of acquisition
Indirect acquisition:
By acquiring the Holding
Companies, the Acquirers
acquired 71.25% of the
Network18 Emerging Voting
Capital;
55.03% of the TV18
Emerging Voting Capital; and
47.60% of the Infomedia
Emerging Voting Capital.
Open Offer:
Open offer made by the
Acquirers to the public
shareholders of the Indirect
Targets to acquire as follows:
Network18: 21.95% of the
Network18 Emerging Voting
Capital;
TV18: 26% of the TV18
Emerging Voting Capital;
Infomedia: 26% of the

Deal Structuring
Legal Issues

Tax Considerations

Tax considerations

As per the CCI order dated

May 28, 2012, CCI had held
that by subscribing to the
ZOCDs, which could convert
into 99.99% equity shares of
the Holding Companies, IMT
acquired control over the
Holding Companies.
Accordingly, it seems that
the approval of CCI was not
required under CA 2002.

Raghav and Ritu would be

subjected to capital gains
tax under the ITA for the
sale of the equity shares of
the Holding Companies i.e
for the amount of
consideration received for
the sale of the equity shares
in excess of the price paid
by them for the acquisition
of the respective shares.
If the shares are held by
them for a period in excess
of 36 months, the gains
would be taxed as long term
capital gains. However, if
the period of holding of the
shares is 36 months or less,
Raghav and Ritu would be
subjected to short term
capital gains tax
Additionally, Raghav and
Ritu, being residents would
also be entitled to

Under section 56 of the ITA,

if any company or firm
receives property, being the
shares of a company at a
consideration below the fair
market value of the shares,
the difference between the
consideration and the fair
market value would be
taxed in the hands of the
acquirer.

By virtue of acquisition of
the equity shares of the
Holding Companies, IMT
acquired control over
Network18, TV18 and
Infomedia. Accordingly, an
open offer had to be made
by IMT along with the PACs
for Network18, TV18 and
Infomedia.

As mentioned above, the

tax implication under
section 56 (2)(viia) would be
applicable only where the
recipient is a firm or a
company

Regulatory and Legal Issues

Did investment in
ZOCDs require CCI
approval?

The definition of shares under CA 2002 clearly includes such instruments as

ZOCDs
Upon analyzing the segments in which RIL and Network 18 group are present
CCI concluded that the proposed combination would not have any adverse
effect on competition in India

Did investment in
ZOCDs require open
offer under the
Takeover Code?

ZOCDs do not fall under the ambit of shares under the Takeover Code, unlike the CA
2002
With respect to control, the trustee of IMT was DCPL, which was owned by Raghav and
Ritu and hence there was no change in control
Therefore the investment in ZOCDs in 2012 did not require an open offer under the
Takeover Code

Why did RIL use IMT

as an investment
vehicle instead of
investing directly?

To provide semblance that the transaction does not result in a change in control, RIL
decided to invest through a trust
The first trustee of IMT was DCPL controlled by Raghav and Ritu. This means that there
was no change in control happening and consequently the obligations under Takeover
Code would not be triggered
Also, the trust with Raghav as trustee would incentivize him to enter into the
transaction and also the trust would give an image of integrity of Network 18
remaining intact

Current
Situation

Intended objectives

Access to Exclusive content across segments for

Foray into 4G
Network 18 could act as a PR agency for Reliance
Group
Cash infusion into Network 18 Group

Benefits

Porters 5 Forces Analysis

Bargaining Power of
Suppliers
Content providers play
a crucial role
Depending on the
content , the channel
gets viewership

Threat of New entrants

Capital Intensive , Regulations
Content generation, Creative
Manpower
Direct Operating Cost High
High Capex, Promotion Expenditure
Entry Barriers
High
Bargaining power of Buyers
Rivalry
Two Types AD & General
Among
Viewer
Existing
Depends on Content and
Firms Viewership
High
High
Medium to High
High viewership High
Bargaining power of
Channels, else otherwise
Medium
Threat of Substitutes Other forms of Media
present
Online Content

Thank You