120605 Project Rainbow
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Strictly confidential Project Rainbow 5 June 2012 Final Report Amit Zutshi Vaibhav Saini Partner Associate Vice President Transaction Advisory Services Transaction Advisory Services T +91 22 6192 0249 T +91 22 6192 2095 M +91 98 1931 9814 M +91 98339 62600 F +91 22 6192 3000 F +91 22 6192 3000 E [email protected] E [email protected] Strictly confidential Transmittal Letter As requested, we enclose a copy of our final confidential report in accordance with our engagement letter and its attachments (our "Engagement Letter"). This report has been prepared on the basis of field work carried out up to April 25, 2012. Our report is confidential and is released to you on the basis that it is not to be copied, referred to or disclosed, in whole or in part, without our prior written consent, save as permitted in our Engagement Letter. In accordance with that letter, you may disclose our report to your legal and other professional advisers in order to seek advice in relation to our work for you, provided that when doing so you inform them that, to the fullest extent permitted by law, we accept no responsibility or liability to them in connection with our report and our work for you. The primary sources of data in preparing this report have been documented throughout this report. While we have made an attempt to source data from reputable sources, we do not accept responsibility for such information. Details of our primary information sources are stated throughout the report and we have satisfied ourselves, so far as possible, that the information presented in our report is consistent with other information which was made available to us in the course of our work in accordance with the terms of our Engagement Letter. We have not, however, sought to establish the reliability of the sources by reference to other evidence. This engagement is not an assurance engagement conducted in accordance with any generally accepted assurance standards and consequently no assurance opinion is expressed. Our report makes reference to 'EY Analysis'; this indicates only that we have (where specified) undertaken certain analytical activities on the underlying data to arrive at the information presented; we do not accept responsibility for the underlying data. The prospective financial information set out within our report has been based on the financial model built by the company and provided to us. This model has been prepared by the company based on several assumptions about key variables which are internal and external to the company; we do not accept responsibility for such information. In reviewing the assumptions in the prospective information, we have relied on published sources of data, third party organizations and discussion with the company's management. We must emphasize that the realisation of the prospective information is dependent on the continuing validity of the assumptions on which it is based. The assumptions will need to be reviewed and revised to reflect any such changes in economy, cost structures or the direction of the business as they emerge. We accept no responsibility for the realisation of the prospective financial information. Actual results are likely to be different from those shown in the prospective financial information because events and circumstances frequently do not occur as expected, and the differences may be material. Our data gathering and analysis do not constitute recommendations to you as to whether or not you should proceed with the proposed transaction. Page 2 Commercial Due Diligence Ernst & Young copyright Strictly confidential List of primary discussions Company Category Interviewee Profile Madison Media Planner Cadbury‟s Account Manager HUL Advertiser Brand Manager ITC Advertiser Brand Manager Fulcrum Media Planner HUL Account manager Digicable Network India Pvt. Ltd. MSO Head of AP Operations A.C.N. Cable Pvt. Ltd. MSO Head of AP Operations Zee Telugu Market player Ad Sales Star Group Market player Ex-Zee Telugu; advisor to multiple MSOs Regional market expert Consultant to MSOs in AP Manager – Movie print processing Film distribution Manager lab Page 3 Commercial Due Diligence Ernst & Young copyright Strictly confidential Abbrevations Term / Term / Abbreviation Definition / Expansion Abbreviation Definition / Expansion AP Andhra Pradesh HSM Hindi Speaking Market Bn Billion INR Indian Rupee Cr Crore Mn Million CAGR Compounded Annual Growth Rate NPT Non Prime Time C&S Cable and satellite PT Prime Time CY Current year PTS Per Ten Second ER Effective Rate TVR Television Viewership Rating FCT Free Commercial Time FTA Free To Air FY Financial Year GEC General Entertainment Channel GRP Gross Rating Point GSDP Gross State Domestic Product Page 4 Commercial Due Diligence Ernst & Young copyright Executive summary Andhra Pradesh: Regional TV market Assessment of Target’s business - Company overview - GEC channel - Movies channel - Music channel - Gold channel Business plan assessment Strictly confidential Executive Summary (1/4) Currently estimated at around Andhra Pradesh (AP) is an important and evolved regional market for television broadcasting INR 1,100 Cr and expected to ► It is the second largest regional C&S market with around 14 Mn C&S households grow to INR 2,000 Cr by FY16, ► Telugu content commands ~8% of the overall viewership of televised content in India, second only to Andhra Pradesh is an Tamil among regional content important regional market for ► ~85% of the Telugu speaking population in India lives in the home state i.e. AP (2); restof the Telugu television broadcasting in India speaking population is nearly equally split in Tamil Nadu, Karnataka and Rest of India Currently estimated at around INR 1,100 Cr, the growth in AP television broadcasting market is likely to be driven by steady growth in advertising revenue and relatively high growth in subscription revenue on the back of digitization Around 65% of the viewership in AP is for Telugu channels, with movies as the most Viewership share of Telugu channels has remained stable at around 65% over the last few years popular content ► Movies and movie-based content are the most popular content in AP market, commanding a stable viewership share of around 50% over the last six quarters ► Serials (fiction content) seems to be the second most popular content category with a viewership share ranging between 20-23% There could be some risks The evolving regulatory framework for television broadcasting and distribution could pose some associated with the evolving risks and challenges for the broadcasting industry regulatory framework for the ► Restricting available Free Commercial Time (FCT) may impact the number of advertising slots available industry for sale by the Target thereby affecting its advertising revenue ► Reduction in viewership for some existing pay channels post digitisation, due to low pull, may lead to their migration to FTAs. This could exert pressure on Rainbow’s ability to continue to charge for its channels ► TRAI’s discussion about split of subscription revenue between various industry stakeholders may lead to a reduction in broadcaster’s share thereby impacting Target’s subscription revenue Page 6 Commercial Due Diligence Ernst & Young copyright Strictly confidential Executive Summary (2/4) Gemini is the market leader in Gemini (Sun TV) is the market leader in AP with 26% of the GRPs in Mar-12; Rainbow has AP; however, Rainbow, on established itself as the No. 2 player over the past few quarters account of recent channel ► Sun group (Gemini) has the widest range of Telugu channels, followed by Rainbow launches, has gained market ► While Gemini’s share of GRPs has witnessed a decline from 32% to 26% over the last six quarters, share and has established itself Rainbow has managed to nearly double its share to ~15% currently during this period; this could be as the second largest largely attributed to the launch of two new channels – Rainbow Movies and Rainbow Gold broadcasting group ► There has been consistent increase in the number of Telugu channels over the last four years, with a majority of addition in the news and movies genres ► While smaller broadcasting houses have launched Telugu channels such as Xtra, UTV Action Telugu and N TV in the last year, they have not been able to make a significant mark on the market so far Rainbow has grown its Rainbow has grown rapidly at ~30% p.a. from ~ INR 80 Cr in FY09 to ~ INR 170 Cr in FY12; it has revenues at 30% p.a. (INR 170 improved its profitability (EBIT)from 11% to 25% during this period Cr in FY12) and improved its ► Advertising revenue accounts for ~80% of Rainbow’s total revenues across the period; subscription profitability to 25% (FY12) over revenue is the other key revenue stream the past four years Rainbow may be able to increase ad and subscription rates as it gains further market share and Further, industry discussions realizes full benefit of its 2nd position in the market suggest that there is potential ► Significant dependence on national FMCG players such as HUL, P&G and ITC has limited Rainbow’s for Rainbow to increase its ability to negotiate higher ad rates, particularly through the CPRP model; however, industry discussions advertising and subscription suggest potential for Rainbow to increase its ad rates (flat as well as CPRP) if it continues to narrow the revenue in the future, provided gap with Gemini it manages to gain market ► Further, Rainbow’s subscription revenue is approximately a third of that of Gemini and half of Eenadu share TV (which