RIL-Disney 'game-changing' deal gets a thumbs-up from analysts

Analysts have given a thumbs up to the Reliance Industries (RIL) and Walt Disney Co (Disney) proposed a joint venture (JV).

The stock of the Mukesh Ambani-controlled company gained nearly 1.5 per cent on Thursday (February 29) to Rs 2,952 levels as compared to the S&P BSE

Sensex that traded marginally weak, down 0.2 per cent to 72,172 levels in intra-day trades.

The JV, analysts at Emkay Global said, can alter the paradigm of the media & entertainment industry with the establishment of the single-largest player in the broadcasting and digital space with a 40-45 per cent advertisement market share.

Given its sheer size, the JV will also be able to flex its muscle and have a potentially higher bargaining power with content producers and advertisers.

The development will be negative for other players such as Zee, analysts said, who will now have to compete with a much larger entity.

A combined Zee + Sony entity, with a 25-30 per cent share, said analysts at UBS, would have been a strong competitor to the Disney + Reliance JV, but with the merger having fallen through, both Zee and Sony individually will likely feel the impact of a dominant competitor.

We have a Neutral rating on Zee - although our Zee price target of Rs 260 still incorporates the merger, our implied value per share in the event of merger falling through is Rs 190,  wrote Aditya Chandrasekar, Navin Killa and Amit Rustagi of UBS in a recent note.

Game changer

The Reliance   Disney JV, Abneesh Roy, executive director and head of research at Nuvama Institutional Equities believes, most likely happened due to disruption by JIO by bagging IPL digital rights, which led to a loss of 25 million subscribers for Hotstar.

Disney-Hotstar was burning a lot of money in sports businesses.

A few years ago, Star saw ownership change with Disney taking over. JIO with its last mile connectivity, clearly will further deepen its ability to transform the advertising and subscription landscape in India.

RIL also owns a major chunk of cable TV subscribers, which will be a plus for the merged entity, Roy said.

Disney's India business, according to Jefferies, has been valued at Rs 25,900 crore, while RIL's Viacom18 has been valued at Rs 33,000 crore.

RIL will own 16.34 per cent directly in the merged entity, with Viacom18 46.82 per cent and Disney 36.84 per cent, respectively.

We had not included the valuation of Viacom18 in our some-of-the-parts (SOTP) valuation.

With the JV valued at Rs 70,300 crore post money, RIL's effective interest in the JV works out to Rs 28,000 crore, adjusted for minority interest.

This translates to Rs 40/share of incremental value in RIL s SOTP, the Jefferies note said.

Higher ARPU

The honeymoon period for consumers, too, is likely to end, Roy of Nuvama feels, as subscriber rates both in digital and linear television (TV) are set to rise.

The Reliance Disney entity, he believes, will be able to bring its sports business to profitability gradually by hiking subscriber average revenue per user (ARPU) and advertisement rates.

Another advantage for RIL is that the company can also exploit its large user base in the telecom segment, with bundling of packs expected to be a key focus area.

This entity will also hold a majority of the sporting rights, particularly cricket, analysts said.

In areas like IPL, where Disney and RIL were competing on ad revenue on their digital and television platforms, this partnership can aid and tilt the bargaining power back in favor of the merged entity.

However, the merged entity s dominant position should attract CCI's scrutiny, where it can be asked to let go of a few channels like in the case of the now-cancelled Zee-Sony merger, Chawla of Emkay said.

Emkay's back-of-the-envelope calculation of RIL s media business value (including Rs 33,000 crore from this JV based on 46.9 per cent overall stake of RIL) stands at around Rs 40,300 crore, including Network18.

Against this, they estimate RIL to have invested around Rs 40,100 crore so far in the media business (including the Rs 11,500 crore new infusion).

Value accretion is not significant in the short-term, but it is advantageous strategically, given that Disney's valuation is significantly lower than previously reported, Emkay said.

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