Supporting documents for AGM 2014, Agenda 3: ≠≠≠Considering to ratify the participation of the auction for License to use Allocated Frequencies for National Commercial Digital Television Services and the execution of the Digital Television Network Services Agreement, including, the acquisition of related asset.
Report regarding the Acquisition of Licenses to use Allocated Frequencies for National Commercial Digital Television Services and Opinion of the Independent Financial Advisor on Acquisition of Assets
BEC World Public Company Limited
Supporting documents for AGM 2014, Agenda 3: Considering to ratify the participation of the auction for License to use Allocated Frequencies for National Commercial Digital Television Services and the execution of the Digital Television Network Services Agreement, including, the acquisition of related asset.
- Translation –
Report regarding the Acquisition of Licenses to use Allocated Frequencies
for National Commercial Digital Television Services
1. Date of acquisition
January 13, 2014 BEC-Multimedia Co. Ltd. (“BECM”) , a subsidiary company, in which the Company hold 99.99% of shares, has been notified by National Broadcasting and Telecommunications Commission (“NBTC”) that BECM won an auction for Licenses to use Allocated Frequencies for National Commercial Digital Television Services (“Digital TV License”) for 3 categories, 1) High-Definition for Variety Category; 2) Standard-Definition for Variety Category; and 3) Standard-Definition for Kids and Family Category. BECM is required to 1) pay the 1 st installment of the license fees, and 2) submit an application for using television network services from the authorized digital television network service provider within 30 days upon receiving the notification of winning auction result, and to file the application for business operation license within 45 days upon receiving the notification of winning auction result.
February 10, 2014 BECM paid the 1 st installment of the license fees for all 3 categories of the said license, in the total amount of 1,561.237 Million Baht and submitted a 5,362.733 Million Baht bank guarantee to secure the outstanding payment, provided that VAT is already included in such payment and bank guarantee.
February 10, 2014 BECM entered into the digital television network services agreement with Thai Public Broadcasting Service (“Thai PBS”) .
February 21, 2014 BECM already filed the application for telecommunications business license for the above 3 categories license.
Upon the completion of the license’s precondition, NBTC shall consider issuance of “Digital TV License” and “Telecommunication Business License” to BECM.
2. The relevant parties and relationship with the company
2.1 The acquisition of Digital TV License
Grantee of License: BECM
Grantor of License: NBTC
There are no relationship between NBTC and BECM which could be constituted as “a Connected Person ” under regulations of The Capital Market Supervisory Board and The Stock Exchange of Thailand (“ SET ”).
2.2 The execution of digital television network services agreement
Client: BECM
Network Services Provider: Thai PBS
Page 1 of 21 Supporting documents for AGM 2014, Agenda 3: Considering to ratify the participation of the auction for License to use Allocated Frequencies for National Commercial Digital Television Services and the execution of the Digital Television Network Services Agreement, including, the acquisition of related asset.
There are no relationship between Thai PBS and BECM which could be constituted as “a Connected Person ” under regulations of The Capital Market Supervisory Board and SET.
2.3 The purchasing of television studio equipment
Purchaser: BECM
Seller: The ordinary television studio seller with no relationship with BECM which could be constituted as “a Connected Person” under regulations of The Capital Market Supervisory Board and SET.
3. Details and size of transaction
Details of transaction
There are 3 main essential parts to conduct as a TV Provider, digital terrestrial television broadcasts services provider (“DTTV”) (National Service) i.e. 1) being a grantee of Digital TV License terrestrial base (National Service); 2) entering into digital television network services agreement with the NBTC’s license digital television network service provider; and 3) providing television equipment and studio to produce and send television signal to network services provider to broadcast television signal on national wide.
Therefore, BECM, as a business operator in DTTV has 3 operating costs, having details as follows:
1.) The Digital TV License fees for 3 categories in the total of 6,471 Million Baht (Exclusive of VAT), having the detail as follow:
1) High-Definition Variety Category, at the bidding price of 3,530 Million Baht.
2) Standard-Definition Variety Category, at the bidding price of 2,275 Million Baht.
3) Standard-Definition for Kids and Family Category, at the bidding price of 666 Million Baht.
2.) Rental fee for network service for 1 high-definition channel and 2 standard-definition channels with Thai PBS for fulltime television signal broadcasting. Such rental fee shall be paid until June 16, 2038, in the total of 3795.55 Million Baht (Exclusive of VAT).
3.) Now BECM is in the process of considering building studio and purchasing television equipment the total budget, around 852.63 Million Baht (Exclusive of VAT). However, in the initial phase of business operation, BECM will lease the studio and television equipment from the Company’s affiliates which operating in studio and television equipment services.
Category and size of transaction
Under the criteria of the Notification of the Board of Governors of SET Re: Disclosures of Information and Practices of Listed Companies in Acquisition or Disposal of Assets B.E. 2547, having compared the abovementioned 3 transactions in Clauses 1.) – 3.), having total value of 11,119.18 Million Baht, with the Company’s total asset value calculated from the audited consolidated financial statement on December 31, 2013, of 12,196.07 Million Baht, the size of the transaction is equal to 97.17% of the total asset value of the Company, which constituted as “ Class 1 transaction ”.
Therefore, the Company is required to disclose transaction information to SET and to obtain the rectification and approval for such transaction from the shareholders’ meeting as well as to appoint an independent financial advisor to provide an opinion on the appropriateness of the transaction and fairness of the price and conditions of the transaction to the shareholders for their consideration.
Page 2 of 21 Supporting documents for AGM 2014, Agenda 3: Considering to ratify the participation of the auction for License to use Allocated Frequencies for National Commercial Digital Television Services and the execution of the Digital Television Network Services Agreement, including, the acquisition of related asset.
4. Details of the acquired assets
1.) “Digital TV License” and “Telecommunication Business License” for National Business Service for 3 channels in 3 categories, i.e. (1) High-Definition Variety Category, (2) Standard-Definition Variety Category and (3) Standard-Definition for Kids and Family Category, for the period of 15 years upon receiving the authorization.
2.) Network services in nationwide for 1 high-definition channel and 2 standard-definition channel with Thai PBS for fulltime television signal broadcasting. The commencing of the said services fees will be charged until June 16, 2038 in the total of 3795.55 Million Baht.
3.) Studio and television equipment.
5. Total value of consideration and term of payment
Total value of consideration
(Unit: Million Baht) No. Description Value of Consideration 1. Digital TV License for High-Definition Variety Category 3,530.00 2. Digital TV License for Standard-Definition Variety Category 2,275.00 3. Digital TV License for Standard-Definition for Kids and Family Category 666.00 Total 6,471.00
Term of Payment:
The fees payment for the “Digital TV License” is in installments as follows:
Installment 1 : Paying 1,256.1 Million Baht (after deducted the bidding guarantee, which BECM has paid on October 2013, in the amount of 203 Million Baht) within 30 days upon receiving the notification of winning auction result.
Installment 2: Paying 1,053.1 Million Baht within 30 days from the date of completion of 1 year upon receiving the Digital TV License.
Installment 3: Paying 1,091.2 Million Baht within 30 days from the date of completion of 2 year upon receiving the Digital TV License.
Installment 4: Paying 1,091.2 Million Baht within 30 days from the date of completion of 3 year upon receiving the Digital TV License.
Installment 5: Paying 888.2 Million Baht within 30 days from the date of completion of 4 year upon receiving the Digital TV License.
Installment 6: Paying 888.2 Million Baht within 30 days from the date of completion of 5 year upon receiving the Digital TV License.
Remark: 1.) The above fees payment is exclusive of VAT. 2.) For each installment payment, BECM is required to submit the bank guarantee to guarantee the payment of the outstanding fees.
Page 3 of 21 Supporting documents for AGM 2014, Agenda 3: Considering to ratify the participation of the auction for License to use Allocated Frequencies for National Commercial Digital Television Services and the execution of the Digital Television Network Services Agreement, including, the acquisition of related asset.
Total value of consideration for network services
(Unit: Million Baht) No. Description Value of Consideration Rental fee for network services for 1 high -definition channel . For 13.8 1. Million Baht per month 2,277.33 The right to use this service will be expired on June 16, 2038 The network services for 2 standard -definition channel 2. For 4.6 Million Baht per month per channel 1,518.22 The right to use this service will be expired on June 16, 2038 Total 3,795.55
Term of Payment:
Monthly services fees payment
6. Value of the acquired asset
1.) “Digital TV License” and “Telecommunication Business License” for 3 channels in 3 categories, i.e. (1) High-Definition Variety Category, (2) Standard-Definition Variety Category and (3) Standard-Definition for Kids and Family Category, for the period of 15 years upon receiving the authorization in the total value of 6,471 Million Baht (Exclusive of VAT).
2.) Rental fee for network services for 1 high-definition channel and 2 standard-definition channels with Thai PBS for fulltime television signal broadcasting. The said services fee will be charged until June 16, 2038 in the total value of 3,795.55 Million Baht (Exclusive of VAT).
3.) Studio and television equipment investment approximately 850 Million Baht.
7. Criteria for determining the total value of consideration
1.) The value of Digital TV License is in accordance with the regulations and auction procedure of NBTC, in which NBTC specified the minimum auction price for the Digital TV Licenses. In this regard, BECM won auction for 3 channels in 3 categories in the total amount of 6,471 Million Baht which are (1) High-Definition Variety Category for 3,530 Million Baht, (2) Standard-Definition Variety Category for 2,275 Million Baht and (3) Standard-Definition for Kids and Family Category for 666 Million Baht. Please note that the said winning price of BECM is closer to the other winners’ price in the same category.
2.) Rental fee for network services fees is the same price as the other Thai PBS’s client.
3.) The fee for studio and television equipment is based on the market price.
8. The anticipated benefit for the Company
By acquiring of the Digital TV License for 3 categories, the Company will be able to expand its television broadcasting business to every possible channel, aside from the Company’s analog broadcast system, which will increase the Company’s growth and expand the potential of business operation. In addition, as the Company’s concession of “Channel 3 ” analog system will be expired in 2020. This acquisition will increase the Company’s stability and continually of the Company’s broadcasting after the said expiration and will eventually increase the long term benefits of the Company’s shareholders.
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In addition, by using Thai PBS’s television network, which is under the quality control by NBTC to be in accordance with NBTC’s standard, it can be assured that both the Company’s high-definition system and standard-definition system television signal will reach the entire audience nationwide, efficiently.
The new studio and television equipment will increase the efficiency and potential of the content production and television signal quality.
9. Source of funds
The Company will support BECM by providing financial assistance. The Company’s source of funds, therefore, shall be derived from the cash flow of the business operation of the Company and loan from financial institution (if necessary).
10. Opinion of the Board of Director on the transaction
The Board of Director considered that the acquisition of this Digital TV License is a normal business of the Company and is necessary for the continually of the Company’s business. In addition, this transaction is also appropriate and renders benefits to the Company by increasing the profits and value to the shareholders in the long term.
11. Opinion of the Audit Committee and/or directors of the Company which is different from Clause No. 10
- None –
Information on List (2)
12 (1) Total Debt Instrument
- None –
12 (2) Total Term Loans by Specifying Assets as Securities for the Obligation
1.) Promissory note in the total amount of Baht 200 Million due on January 27, 2014, secured by the director of subsidiary company. 2.) Promissory note in the total amount of Baht 10 Million due on June 9, 2014, secured by the subsidiary company.
12 (3) Total Other Liability including Overdraft by Specifying Assets as Securities for the Obligation
- None –
12 (4) Contingent Liability
After the payment of Digital TV License fee 1 st installment for all 3 categories in the total amount of Baht, 1,561,237,000 (inclusive of VAT), there are 5 more installments which will be due in 2015 – 2019 as follow: (Unit: Baht) Installments Due on Rate VAT Total 2 2015 1,053,100,000 73,717,000 1,126,817,000 3 2016 1,091,200,000 76,384,000 1,167,584,000 4 2017 1,091,200,000 76,384,000 1,167,584,000 5 2018 888,200,000 62,174,000 950,374,000 6 2019 888,200,000 62,174,000 950,374,000
Page 5 of 21 Supporting documents for AGM 2014, Agenda 3: Considering to ratify the participation of the auction for License to use Allocated Frequencies for National Commercial Digital Television Services and the execution of the Digital Television Network Services Agreement, including, the acquisition of related asset.
Aside from the above Digital TV License fee payment, there are other Contingent Liabilities related to the Digital TV License, i.e. (1) the obligation to pay “annual license fee” and (2) the obligation to pay “annual subsidy” to the Broadcasting and Telecommunications Research and Development Fund for the Public Interest at the rate of 2% of the total income before expenses deduction from the total advertisement income, whether directly or indirectly, and any incomes related to the Digital TV License.
In addition, to broadcast the above Digital TV, the Company shall be also responsible for rental fee for the services of digital terrestrial television network, which the Company has entered into the agreement with Thai PBS for 3 channels, i.e. 1 high definition channel and 2 standard definition channels.
However, as the rolling out of Thai PBS network is still at the early stage, the services area will be gradually expanded from the main big city first. Such trial services will commence on this upcoming April, 2014; provided that, NBTC regulates that the network services shall cover 39 networks nationwide within June, 2015. Therefore, the network services fees in the early stage shall be calculated from the actual services area which will be eventually and gradually expanded to reach 39 networks in nationwide.
The network services fee for 1 high definition channel and 2 standard definition channels, which the Company shall be responsible, will be gradually increased along with the expansion of Thai PBS’ network services. Such fee shall be annually as follow:
From Services fee (Baht/Month) VAT Total April, 2014 4,265,000 298,550 4,563,550 May, 2014 6,010,000 420,700 6,430,700 June, 2014 9,215,000 645,050 9,860,050 August, 2014 10,960,000 767,200 11,727,200 October, 2014 15,005,000 1,050,350 16,055,350 December, 2014 16,775,000 1,174,250 17,949,250 January, 2015 18,790,000 1,315,300 20,105,300 April, 2015 20,750,000 1,452,500 22,202,500 June, 2015 until June 16, 2028 23,000,000 1,610,000 24,610,000
Remark: *It is agreed that Thai PBS is entitled to adjust the service fee every three years pursuant to inflation rate of that year together with the Notification of the Bank of Thailand or the reliable financial institution.
13(1) The Information Regarding The Business Operation And Tendency Of BEC World Group, Subsidiaries and Associates
Business Operation Of BEC World Group
On 31 December 2013, the BEC WORLD Group comprises of BEC World Plc., the parent company; 24 subsidiary companies and 2 associated companies, which could be divided by type of business as follows:
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1. Broadcasting and Media Business
1.1 TV Broadcasting
• Terrestrial Free to Air TV broadcasting - Bangkok Entertainment Co., Ltd. operates Thai TV Channel 3, a terrestrial analog system in nationwide free to air television in analog network under the concession agreement with MCOT Public Company Limited. In this 2014, BEC-Multimedia Co., Ltd. will also operate 3 more TV channels in a terrestrial digital system.
• Subscribed TV broadcasting: BEC World Group pays attention to subscribed TV broadcasting to broadcast its signal to viewer in nationwide and worldwide by already broadcasted its TV program to Japan and U.S.A, including looking for additional new business alliance in various countries.
1.2 Radio Broadcasting - Bangkok Entertainment Co., Ltd. operates MCOT radio station FM frequency 105.5 MHz. You & I Corporation Co., Ltd. operates FM frequency FM 95.5 MHz, whereby Virgin BEC-TERO Radio (Thailand) is responsible for sale of air time, giving advice regarding program development. In addition, due to the experience in radio business operation, BEC-TERO Entertainment Plc. and BEC- TERO Radio have jointly operate the programs on FM frequency FM 98.0 MHz.
1.3 New Media – i.e., internet and mobile phone related businesses, operated by BECi Corporation Ltd. We also look for opportunity to operate satellite TV business through Bangkok Satellite & Telecommunication Co., Ltd. and Satellite TV Broadcasting Co., Ltd. In addition, BEC-TERO App Co., Ltd. is also operating on the electronic book (E-book) business and other related IT business.
2. Programme Sourcing–Production, Distribution and Supporting Businesses.
2.1 Entertainment and Documentary Programme Sourcing, Production and Distribution operated by BEC World Public Co., Ltd., Rungsirojvanit Co., Ltd., New World Production Co., Ltd., Bangkok Television Co., Ltd., TVB 3 Network Co., Ltd., BEC International Distribution Co., Ltd. and BEC-TERO Entertainment Plc. In addition, Forever BEC-TERO Co, Ltd. also source and produce program for broadcasting in Republic of the Union of Myanmar.
2.2 Production of Variety Shows, content and Promotional campaign activities operated by BEC-TERO Entertainment Plc. In addition, BEC-TERO Scenario Co., Ltd. conducts business relating to musical play. BEC-TERO True Visions Co., Ltd. conducts business relating to sport activities management and services. BEC-TERO Sasana Co., Ltd. administrates and manages football club. IMG BEC-TERO Sports & Entertainment Co., Ltd. organizes sport competition, contest and show, whereby ThaiTicketMajor Co., Ltd. provides public relations activities and advertising services, as well as ticket sales (shows and bus tickets). BEC-TERO Myanmar Co., Ltd. provides show ticket sale and reservation services, entertainment activity services and the sale of music and program products in Republic of the Union of Myanmar.
2.3 Extended and Supporting Businesses - BEC IT Solution Co., Ltd., provides information technology services. BEC Asset Co., Ltd. provides asset management and leases. BEC Broadcasting Center Co., Ltd. provides broadcasting facilities services. In addition, there is a plan to provide a wide range of production services, including TV studio and equipment for rental and post-production services by BEC STUDIO Co., Ltd. With respect to news production; “BEC News Bureau Co., Ltd.” provides news for broadcasting on radio and television, including selling some certain BEC’s news to other news stations.
At present, BEC World Public Co., Ltd. has a registered capital of Baht 2 billion divided into 2,000 million ordinary shares with par value at Baht 1 per share. The company's shares listed, under its abbreviation as "BEC", has begun trading on the SET on July 18, 1996. As of 31 December 2013, BEC WORLD Group employs around of 2,087 employees.
BEC World Plc. has registered office at 2, 3, 8, 9, 30-34 Fl., 3199 Maleenont Tower, Rama IV road, Klongton, Klongtoey, Bangkok 10110 Tel: (66) 2204-3333, (66) 2262-3333 Fax: (66) 2204-1384 Website www.becworld.com
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13 (2) Statement for financial position during the past 3 years together with explanation and analysis of financial status, revealing risk factors which will affect profitability of registered company.
BEC World Public Company Limited and Subsidiaries Statements for Financial Position As at December 31 (Unit: Thousand Baht) Approved 2556 2555 2554 Amount % Amount % Amount % ASSETS Current Assets Cash and cash equivalents 2,522,664 3,097,706 3,147,181 Short-term investments 3,265,908 2,568,157 2,000,600 Trade and other receivables 1,483,929 1,192,332 906,660 Short-term loans to related parties 91,495 390 - Inventories 4,680 1,476 418 Other current assets 261,529 221,148 168,713 Total Current Assets 7,630,205 62.56% 7,081,209 65.73% 6,223,572 63.19% Non-current Assets Available-for-sale securities 206,787 1.70% 106,598 0.99% 55,337 0.56% Investments in associates 86,994 0.71% 23,406 0.22% - Other long-term investments- 3,000 0.02% 3,000 0.03% 3,000 0.03% Other companies Investment property 65,150 0.53% 63,250 0.59% 63,250 0.64% Property, plant and equipment 316,818 2.60% 268,783 2.49% 258,237 2.62% Intangible assets 70,735 0.58% 65,836 0.61% 55,260 0.56% Deferred right to use property 1,148,361 9.42% 1,039,406 9.65% 1,053,100 10.69% Deferred additional compensation 291,703 2.39% 338,483 3.14% 385,391 3.91% Security deposit for auctions 203,000 1.66% - - Deferred pictures rental, picture 1,387,277 11.37% 1,243,705 11.54% 1,264,075 12.84% products, plays and copyright charges Deposit on pictures copyright 4,079 0.03% 3,200 0.03% 3,400 0.03% Prepaid plays production 493,683 4.05% 269,137 2.50% 207,941 2.11% Deferred tax assets 114,483 0.94% 126,099 1.17% 117,448 1.19% Other non-current assets 173,794 1.44% 141,807 1.31% 158,516 1.63% Total Assets 12,196,069 100.00% 10,773,919 100.00% 9,848,527 100.00%
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BEC World Public Company Limited and Subsidiaries Statements for Financial Position (Continue) As at December 31 (Unit: Thousand Baht) Approved 2556 2555 2554 Amount % Amount % Amount % LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Short-term borrowings from Bank 210,000 - - Trade and other payables 860,975 515,322 398,279 Accrued expenses 562,839 507,792 421,941 Current portion of financial leases 1,025 749 - Short-term borrowings from related party - - 7,840 Corporate income tax payable 472,630 569,579 596,779 Other current liabilities 499,043 468,507 620,731 Total current liabilities 2,606,512 21.37% 2,061,949 19.14% 2,045,570 20.77%
Non-current Liabilities Financial leases 2,898 0.02% 2,645 0.02% - Provision for long-term employee benefits 471,172 3.86% 401,566 3.73% - Other non-current liabilities 585 0.00% 460 0.00% 373,113 3.79% Total Non-current Liabilities 474,655 3.89% 404,671 3.76% 373,113 3.79% Total Liabilities 3,081,167 25.26% 2,466,620 22.89% 2,418,683 24.56%
Shareholders’ Equity Share capital Authorized share capital 2,000,000 2,000,000 2,000,000 Paid-up share capital 2,000,000 2,000,000 2,000,000 Premium on common stocks 1,166,724 1,166,724 1,166,724 Retained earnings Appropriated- Legal reserve 200,000 200,000 200,000 Unappropriated 5,364,467 4,702,449 3,925,202 Other components of shareholders’ equity 95,865 13,292 (27,588) 8,827,056 72.38% 8,082,465 75.02% 7,264,338 73.76% Non-controlling interests 287,846 2.36% 224,834 2.09% 165,506 1.68% Total Shareholders’ Equity 9,114,902 74.74% 8,307,299 77.11% 7,429,844 75.44% Total Liabilities and Shareholders’ Equity 12,196,069 100.00% 10,773,919 100.00% 9,848,527 100.00% Booked Value (Baht) 4.56 4.15 3.71 Par Value (Baht/Share) 1.00 1.00 1.00 Ending common stocks (Share) 2,000,000 2,000,000,000 2,000,000,000
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BEC World Public Company Limited and Subsidiaries Statements for Financial Position (Baht) As at December 31 (Unit: Thousand Baht)
Approved 2556 2555 2554 Amount % Amount % Amount %
REVENUES Advertising income 14,945,086 89.83% 13,613,503 90.13% 11,967,163 92.27% Income from copyright and other services 519,953 3.13% 451,131 2.99% 267,870 2.07% Income from organizing concerts and shows 873,846 5.25% 800,972 5.30% 566,559 4.37% Sales of goods 89,756 0.54% 20,374 0.13% 2,007 0.02% Other incomes 208,190 1.25% 219,003 1.45% 166,739 1.29%
Total Revenues 16,636,831 100.00% 15,104,983 100.00% 12,970,338 100.00%
EXPENSES Cost of sales and services 6,710,879 40.34% 6,195,880 41.02% 5,601,923 43.19% Cost of organizing concerts and shows 833,794 5.01% 685,012 4.54% 466,051 3.59% Selling expenses 607,402 3.65% 514,583 3.09% 434,753 2.61% Administrative expenses 1,319,222 7.93% 1,277,377 7.68% 1,195,811 7.19% Directors’ remuneration 20,220 0.12% 18,965 0.11% 19,000 0.11%
Total Expenses 9,491,517 57.05% 8,691,817 57.54% 7,717,538 59.50%
Share of profit of associates held by subsidiary 60,158 0.36% 22,829 0.15% - Profit before Financial Costs and Income Tax Expenses 7,205,472 43.31% 6,435,995 42.61% 5,252,800 40.50% Financial Costs 2,362 0.01% 436 0.00% 636 0.00%
Profit before Income Tax Expenses 7,203,110 43.30% 6,435,559 42.61% 5,252,164 40.49% Income Tax Expenses 1,448,899 8.71% 1,498,420 9.92% 1,622,560 12.51% Profit for the years 5,754,211 34.59% 4,937,139 32.69% 3,629,604 27.98%
Profit attributable to Equity holders of the parent 5,589,484 33.60% 4,777,247 31.63% 3,530,346 27.22% Non-controlling Interests 164,727 0.99% 159,892 1.06% 99,258 0.77% Earnings per share to equity holders of the parent Basic Earnings Per Share (Baht/ Share) 2.79 2.39 1.77 Par Value (Baht) 1.00 1.00 1.00 Average common stocks (Share) 2,000,000,000 2,000,000,000 2,000,000,000
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Management Discussion and Analysis: MD&A
Industrial Environment – Broadcasting and Advertising Media Business: Domestic broadcasting business comprises 2 parts, i.e., (1) Free TV business and (2) Subscribed TV Business.
With respect to normal free TV business, currently there are 6 main TV networks which still broadcast in the old analogue system technology, where the 5 original networks (Channel 3 as operated by a BEC World’s subsidiary company, Bangkok Entertainment Co., Ltd., Channel 5, Channel 7, Channel 9 and Channel 11) broadcast in VHF system and the new network, “Thai PBS”(originally operated under the name “iTV”, then changed to “TiTV” and finally, changed to a public service TV), broadcasts in UHF system. Even though all networks have nationwide broadcasting coverage, however, due to our reputation for decades, only two major networks (channel 3 and channel 7) have dominated the broadcasting industry with the aggregate percentage of viewers during primetime at 70%. Channel 7 has been accepted as the market leader in term of number viewers since it could establish its nationwide network coverage long before its peers and had advantage in creating viewer base. In addition, as Channel 7 focuses its target on viewers having a simple lifestyle, which are the majority viewers, Channel 7’s viewers market share is around 40%. For Channel 3, it had originally focused on viewers in city area, so the percentage sharing in viewers was smaller. Over the past twenty years, channel 3 has expanded its nationwide network coverage like other networks and offered variety of TV programs to suit broader range of audience to increase number of viewers; however, it still has been the second rank in the viewership share, at around 30%, which is lower than channel 7. For other four channels, each of them has only around 10% or less of sharing while channel 11 has the least viewers.
In fact, the TV business competition is not limited to only the current 6 main antenna viewing channels, i.e. Channel 3, Channel 5, Channel 7, Channel 9, Channel 11 and Thai PBS Channel. There are currently over one hundred channels of Thai Free TV, aside from the 6 main channels, which we are familiar with. Such channels can only be viewed through satellite or cable. Therefore, only some viewers, who have installed satellite TV or cable TV, can view such channels. However, there are different of signal quality problem regarding viewing TV via antenna, resulting from various factors, i.e. viewer’s premise location, environment, viewer’s premises and signal transmission pillar; quality factor and the cost of installing and maintenance of the antenna (which is generally higher than the satellite TV). Subsequently, there has been a dramatically high increase in the number of the viewers “Stop using antenna/using satellite dish instead” . Nowadays, there are more than 70 percent of every viewer’s premise in Thailand which use Satellite TV receiver device in order to watch the TV program. Therefore, the TV business competition is not limited to only the current 6 main channels for many years already.
Regarding the business competition among the 6 TV operators in analogue system, actually there are only 5 TV network operators since Thai PBS was transformed into public TV service without advertisement since beginning of 2008.
Neilsen Media research reported that spending budget on advertising via 5 TV stations was beyond 50%, compared to the whole budget for industrial environment since 1997 and it has been growing every single year except 2007 and 2008, which “ITV” was terminated and changed to “TiTV” before transforming into the current Public Broadcasting Service without commercial (Thai PBS) today. In addition, as the growth of 5 TV stations is higher than the whole industry, such television media’s advertising market share is going higher consecutively from 2011, to over 60%.
However, Neilsen Media research reported that Channel 3 and Channel 7, the major TV operators, received their advertising revenue sharing at a rate lower than the market share of their viewers. However, the difference of their advertising revenue sharing between Channel 3 and Channel 7 was closer than their viewer sharing, while small broadcasting operators received their advertising revenue sharing higher than their viewer sharing. However, no one could confirm correctness and accuracy of such report. Although the market share of the two major operators is high, other operators is still aggressively competing to receive bigger market shares.
Even when there are not many TV Channels in the beginning, the competition among each TV Channels are very competitive from the starting point. TV Channels could not charge the viewer directly, advertisement income, the main income of TV Channels. Therefore, there is the two levels overlapping of market/customer/competition among TV Channels, which are “Viewer” and “Advertiser”. TV Channels need “Viewer” to become “Media” so that the customer, “Advertiser”, would advertise on such media. To be the most efficient and proficient “Media”, each TV Channels has been fighting over the viewer for the
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highest and longest view rate from the viewer. In addition, as viewer could only view one channel at a time, therefore, if such viewer is viewing a certain channel at a certain period of time, it means that any other channels are also losing a viewer at the same time, i.e. Winner Takes All. Such factors are the main reason for this serious competition from the starting point. As people mostly study/work during the day time and rest/sleep during the night time, the time when many people would become “Viewer” in the same time is limited to the evening time until sleeping time only. Therefore, it is certain that such time is the best time for TV Channels as “Media”. Furthermore, as most people often do not have to study/work on holidays/weekend, the day time of such holidays/weekend is therefore another good time for TV Channels as an efficiency and proficiency “Media”. As the market capitalization in television advertisement is still small in the past, the competition for advertisement has been packed mainly in those times, resulting in the even more serious competition in such time. However, since the market capitalization in television advertisement has been increasing constantly and became diversified, the competition is also reach the point that the entire broadcasting time is the current competition in television advertisement business.
“BEC” programs also proceeded along with the market trend. In the beginning, “BEC” business was focused from evening time to sleeping time of most people. As the income distribution in the past is mostly in Bangkok. In the light of traffic jammed problem and Bangkokian life style, this make the best time for TV business is a bit late evening, i.e. after 20.00 until sleeping time. Such prime time is the best and the most expensive for advertisement of BEC. Subsequently, when the advertising fee is higher, BEC expands and adjusts BEC’s airtime to comply with the said higher fee by adding more prime time, focusing on the time before and after the aforesaid period of time, including, expanding business airtime to day time period as well by beginning on the day time of every weekend (Saturday – Sunday) and finally expanding such business airtime to daytime of every working day. Now, BEC has conducted TV business for 24 hours since 2011.
However, as a result of new legislation regarding television media, reforming all TV business, under the Constitutional of the Kingdom of Thailand, 1997, and the Act on Organization to Assign Radio Frequency and to Regulate Broadcasting and Telecommunication Services (“NRA Organization Act At the beginning, under the said Act there are two independent entities, i.e. National Telecommunications Commission (“NTC”) and National Broadcasting Commission (“NBC”) . However, although NTC has been established to regulate the telecommunication licenses for many years, there had been no NBC establishment until an enactment of New Constitution in 2007, which still keep the concept by using “ an independent organization ” to regulate in this business. In addition, there was an amendment of NRA Organization Act in 2010 to combine NTC and NBC to be on entity, called National Broadcasting and Telecommunications Commission (“NBTC”) to allocate radio frequency and regulate radio, television and telecommunications business. In the light of NBTC establishment, NBTC has reformed business model of television business into 2 categories, i.e. (1) Terrestrial Business; and (2) Non-Terrestrial Business and also forcing all business entities to use new technology (“Digital TV”) to conduct TV business. There are 48 channels for Digital TV, consisting of 12 Public Channel (mostly conducted by government sector); 12 Community Channel (mostly conducted by non-profit organization); and 24 Business Channel (conducted by private sector and state enterprise, having TV National License from the auction. All Terrestrial business channel has to provide its service for all viewers in nationwide, without any restriction and consideration. All TV channels except Business Channel and some Public Channel (having its business objective for national security or public safety only) have the right to conduct business by receiving advertising fees. With respect to Public Channel, these entities shall be subsidized by government budget for their operation and non-profit organization, operating Community Channel, may ask for financial subsidize from NBTC. In the initial phase (around April 2014), there would be 36 TV Channels, i.e. some Public Channels and Business Channel only since the NBTC procedure regarding Community Channel has not been implemented yet.
To conduct and operate Digital TV, NBTC has divided all operation into 2 parts (by prohibiting the former TV channel business operator from being an owner of TV network together with TV service provider), i.e. (1) TV Network Provider is a broadcaster; and (2) TV Service Provider, responsible for providing TV program and earing income from advertisement.
As for the Network Provider, NBTC has already issued the license for “Royal Thai Army Radio and Television”, “The Government Public Relation Department”, “Thai PBS” and “MCOT” for 5 networks, in which “Royal Thai Army Radio and Television” obtain a license for 2 networks. All network providers have to start their service on this upcoming April. NBTC further regulates that all Network Provider shall provide TV network in nationwide, which cover at least 50% of the total Thai population within the first year, at least 80% of the total Thai population within the second year, 90% within the third year and 95% within the fourth year, respectively.
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The new 24 commercial services channels has been categorized into 3 main categories and 4 sub-categories, which is (1) 7 high definition and 7 standard definition “Variety” channels, (2) 7 “News” channel and (3) 3 standard definition “Kids and Family” channels. Such license for commercial services channel will be issued by the auction only. In addition, NBTC also regulates that each operator company is limited to only 3 sub categories with either one of the high definition “Variety” channel or “News” channel. The term of license is 15 years.
The Auction for the commercial services channels has already completed with the average bidding price of 3,530 – 3,320 Million Baht for the high definition; “Variety” channel license, 2,355 – 2,200 Million Baht for the standard definition “Variety” channel license, 1,338 – 1,298 Million Baht for “News” channel license; and 666 – 648 Million Baht for “Kids and Family” channel license. The other bidder who failed in the auction, also made a bidding price a little lower than those of the winners.
“BEC-Multimedia” (“BECM”) , a subsidiary company of BEC World, has won all the auction for 3 licenses. BECM made a decision to bid for the high definition “Variety” channel instead of the “News” channel. There are 5 groups who won the auction for 2 categories of TV license, i.e. “MCOT”, “True”, “GMM”, “Nation” and “TV Pool”. There are 11 companies, obtaining only 1 license.
In “advertising media” business, the constancy of “reaching the viewer”/ “having the viewer” is the most important issue. Broadcasting in Digital TV system is a new technology which just recently been known to Thailand. It is significantly different from the old system (which has been broadcasting continuously for over 50 years). As for Digital TV, to reach the “Viewer” of Digital TV, it is subject to the broadcasting of Digital TV by “Network Provider”, commencing this upcoming April. Therefore, the rolling out of network and readiness of the receiver are the most essential factors to the number of the “reaching viewer”. In addition, as for the viewer part, currently, there has no single household in Thailand which capable of viewing this Digital TV Channels. Aside from the rolling out of network by Network Provider to reach their household, to “reach” the Digital TV channel, the viewers are also required to prepare their TV receiver and antenna as well. If any viewer, having a domicile in the area of municipality and the Network Provider is able to see and having no burden for installing exterior antenna on the roof. Living out of such area, the exploitation or receiving the said Digital TV is not possible.
Regarding the receiver, the viewers have several options in order to watch Digital TV channel depending on level of budget and preference. The easiest and most economical way (especially if viewing via internal antenna) is to use Set-Top Box which “NBTC” has planned to give the coupons in order to reduce the expense when purchasing it. This Set-Top Box will allow the viewers to watch the new channels via the original TV receiver. However, if the viewers would like to view TV program in higher definition, whether standard or high definition, the viewers is obliged to replace the previous TV receiver with the new TV receiver known as “flat screen”, having the capacity to display high definition programs. This will allow the viewers to watch new TV program channel in full capacity as the service providers provide.
As BEC World group will conduct the three “new channels”, this definitely enhance confidence for the investors/shareholders of “BEC” that there will be a continuity in the core business of BEC World after the present contract of “Channel3” will be expired soon. This is the new source of income for “BEC”. The new income shall satisfy all BEC personal and also attract, induce, improve and maintain the talented persons to work with us. This is the good opportunity for “BEC” to use our existing resources and programs to increase more efficiency, to provide a better service for our customers and to reach more viewers in wider areas. In addition, this also enhances relationship between BEC and viewer. The new “BEC” channels will have a clearer character than “old Channel3” and aim to provide more precise service to the viewers than “old Channel3”. Such channels, explicitly aim to attract the niche market. In this regard, we believe that there is no necessity and benefit for “BEC” to make the similar channel to the former one which is consistent with the business surrounding that it will have the number of new channels launching increasingly. At the beginning, the new channels will focus their investment on a short period each day which we believe they will “draw the viewers” and “generate income” to “BEC” in a short time. Even though “BEC” has advantage in using “old Channel3” to advertise new programs, it would reduce the burden of investment and risk arising from the necessity of putting a large amount of money, resource and time to create viewer base for the new channels or to introduce the new channels to the viewers, which consistent with the circumstance that it will have the number of new channels launching increasingly at the same time. Such short period will be decided by the target audience setting who will be the “Viewer” of the aforesaid channels, together with the behavior of such target group. When such programs succeed at a certain level, they will be used as a leading direction which will help making the business/service expansion easier and will ensure that
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the following programs will be on the right track. Such expansion will be based on the market influence (control) of such channels.
With respect to the non-terrestrial television channels, there are, for instance, the TV channels that do not use antenna, or the channels that use satellite dish, cable or internet system etc., which could be the paid or free channels. According to Broadcasting and Telecommunication Business Act, 2008, “NBTC” can authorize the operators who are interested in this business to apply for the license without auction. Earlier, due to the transition stage, there were many operators providing channel service without obtaining prior permission (since there was no regulation at that time). After that, “NBTC” allowed the interested operators to apply for the license, provided that “NBTC” would issue a temporary license for yearly basis to evaluate the business survival. The aforesaid licenses have issued more than 700 cases. Technically, “NBTC” should have no restriction regarding the issuance of the aforementioned license since this business has no restriction regarding the allocation of frequency resource.
As to subscribe TV business, previously, there has been only one national player who has obtained license and various small local operators. Subsequently, there has been a significant increase in the number of the “Stop using antenna/using satellite dish instead”. Nowadays there are more than 70 percent of every viewer’s premise in Thailand which use TV receiver in order to watch the TV program. As a result, there have been many national operators in subscribed TV business. Although those operators have been in the business for many decades, they have been unable to significantly expand their subscriber base. This causes many operators to change their business model from subscribed member service to be free TV on air for some TV programs without paying membership fee, to be observed by the viewer in priority and will use advertising fee to cover such costs. However, this business strategy does not work. BEC World group is one of the TV program distributors which grant its licenses to use the TV program to some subscribed TV operators. However, the competitive environment in this business is decreased since many business entrepreneurs cooperate among each other.
For radio business, competition is more intensive than TV broadcasting as there are a lot more players including both FM and AM frequencies. With narrower coverage than TV and the failure of grouping in order to broaden service area, each radio program or station has to focus on its niche audience market and has to have a clear market position. Improved and changing economic environment has benefited operators with clear market positions and created more competition among radio operators.
Each of our radio station has created its different niche market and become quite successful. Therefore, we put all our effort to expand radio business. However, as the establishment of the new independent regulatory body (NBC – National Broadcasting Commission), which started by the 1997 Constitution, has been postponed due to the establishment problem. Moreover, even NBTC Board has established already, it has not yet been implemented the provision of radio license, so most of the radio licenses became short-term licenses to be renewed on yearly basis causing the increase of competition to fight for the successful radio frequency and the increase of operating cost, as well as create business interruption if one could not be granted for maintaining the frequency. Although some programs could still be presented to another radio channels, this could reduce the profitability of the radio business. However, radio business would not create any impact against BEC World since the revenue from this business has not been significant proportion.
New media business, which includes internet websites and messaging service via mobile network, such as voice message, text message, still and dynamic image contents, also experienced rising competition as there have been more and more players getting into the market while market volume has been dramatically increased. However, we believe that key successful factors for this business are quality of content and effective marketing. Therefore, we are confident that BEC World group is well-prepared to compete with its peers. Sharing with this new media business will increase opportunity of the group to raise value of its programs. However, even this business has reasonable growth rate, it is considered very small. Therefore, BEC World group has not competed in this business yet, seriously.
Industrial Environment - Program Sourcing and Production Business:
For program sourcing and production business, besides sourcing programs for our own broadcasting business, we have also expanded into film production, live performance and sport competition arrangement. As for film production, even BEC World
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had revitalized the Thai film industry, but there have been a lot of new film producers coming into the market with at least one Thai film a week or even more. Therefore, BEC World group has decided to reduce its role in film production and focuses more on distribution of these Thai films to other countries. While live performance arrangement is quite diversified, the BEC World group has strong experience in organizing international performance of which there are only a few meaningful players. Moreover, BEC World group has forte background, extensive marketing and promotion network for its subsidiaries to engage in TV media and radio businesses. The competition has not been intensive due to BEC World group is a top choice among the leading players in this business for any operator who wishes to organize a show in Thailand.
Explanation and Analysis of Operation and Financial Status and Risk Factors
• Industrial Environment
In 2013 “Nelson Media Research” (Nelson) reported that based on last year base growth, the overall advertising spending in television media and advertising industry has been declined consecutively in every quarter. During the first half year, television media performance was better than advertising industry. However, the tide turned in the second half of the year. In third quarter of 2013, the television media’s growth rate was starting to become lower than the advertising industry last year, which is higher from the live broadcasting of the Olympic Games. Moreover, Nelson also reported that advertising industry has substantially plunged in the last month of the year, to the point that it pulled the growth rate of television media down to loss in the last quarter while the advertising industry is still even. Nevertheless, Nelson stated that the whole year spending on advertising in television media still went up to 1.7%, comparing to previous year which was better than the overall advertising industry that only went up to 1% comparing to previous year. Nelson further reported that internet media has highest growth from the lowest base. Even though, the growth of internet media was the highest among other media, internet media has market shares at only 0.8%, meanwhile, TV media business had the highest market shares at 60.2%. In addition, according to the report, the spending from owners of basic consumer products and the big advertisers, who is the origin of the advertising spending, has been fluctuating. Some advertisers rose their spending up while other advertisers deducted their budget. Some increased sharply and some decreased significantly. Even though the tendency cannot be concluded, it can be seen obviously that many advertisers of car industry, telecommunication, and beverage industry spent their money on advertising more than the previous year.
• Structure of BEC World Group
During the year, 2013, there are a few changes in the structure of BEC World group in the last quarter of last year, as follow: “BEC-TERO Entertainment Plc.”[“BEC-TERO”], a 60% subsidiary of BEC World, had set up a new subsidiary, i.e. “BEC TERO True Visions Co., Ltd”, which BEC-TERO holds 50% shares of Baht 50,000,000 registered capital jointly with another shareholder, holding 50%, which is not considered as a connected transaction, to operate and manage sport business.
• Operating Results
Due to the accounting policy for investments, the reported profit as shown in the separate statements is difference from that shown in the consolidated statements. This MD&A will discuss those numbers shown in the consolidated statements in order to avoid any confusion.
For the year 2013, BEC World group, was able to made Baht 5,589.5 million as its net profit for the shareholders of BEC World; this is the record-high once again, which is much higher than that of the previous year, it is 17% higher, or Baht 812.2 million. The profit growth was achieved as we were able to increase all type of our “revenues” up at the high growth rate and even our “costs and operating expenses” were also increased; but BEC world is still able to keep the increases of “costs and operating expenses” lower than the increases of our revenues pushing our “operating profit” and our “profit before tax” up substantially and we also benefited from the reduction of corporate income tax rate as well.
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• Revenues
For the year 2013, BEC World group is able to generate higher “advertising income”, 9.8 percent higher than that of the previous year, or Baht 1,331.6 million; benefited from purchasing power of macro-economic conditions which have stimulated a lot more new products launched and more intensified competitions among product- owners/advertisers. The increase is resultant of business expansion, programming changes, increases of advertising airtime rate of certain slots; and extension of the slots which carried higher rates further. Revenue and margin of our “concerts and events businesses” are also higher year-on-year. However, the gross profit is lower than that of the previous year due to the loss in the 3 rd quarter and also the first indoor Music Festival which our customers and target audiences had no experience on such event. Our “copyrights and other services income” and “selling income” are higher because the expansion of works, as resultants of the improved macro-economic conditions and the strong market position of our products and services.
• Costs and Operating Expenses
“Costs of services”, especially those not related to “concerts and shows”, increased year-on-year because of our business expansion, programming changes and extension of the slots which carried higher costs which will also enhance our opportunity to generate higher revenue and profit in the longer term; however, such increase has been set-off by decreasing of special TV programs in the previous year, especially EURO 2013 Football matches and London Olympic Games, resulting in the slight increase of costs only. Our “selling expenses” also increased in line with the increased revenues and a lot more activities which helped enhance the awareness of our programming among our trading partners and the general audience which will help improve our revenue. Our “administration expenses” also increased, but not at such a high rate reflecting the effectiveness of our costs control efforts.. Anyhow, BEC World is still able to keep the increase of “costs and operating expenses” at the lower rate than the increase of our revenues according to the nature of fixed operating costs of our business.
• Financial positions
Our “total assets” at the end of the year 2013 increased when compared with balances at the end of the previous year. The increases of assets are both in “current assets” and “non-current assets”. Regarding our Current assets, the resultants of much better results of our businesses year-on-year pushed our “cash and short-term investments” and “trade accounts receivable” up. Our “non-current assets” especially the “property, plant and equipment”, “deferred right to use property”, “security deposit for of Digital TV auction”, “deferred pictures rental, picture products, plays” and “prepaid play productions” rose up, as the resultants of our continuing investments and preparation for the commencement of TV digital service in 2014. Our “total liabilities” level are higher than the end of the previous year, which increased from our “trade accounts payable” in respect to our normal investments and transactions; however, it was still at the lower rate compared to the increase of our “current assets”. Our shareholders’ equity also increased from the level at the end of the previous year from the higher “profit” from the improved businesses as mentioned. BEC World’s financial positions are strong as usual.
Risk factors
1) Risk Factors of Business Operation
• Growth of Advertising Costs and Expenses
As BEC World’s major incomes have been derived from selling airtime to advertisers, the key risk factor is the growth of advertising spending of economic as a whole which depends on purchasing power of consumers in the country and competition among manufacturers who are the real advertising spenders. Though the management is unable to control these factors directly, we believe that this is not a serious concern for our business operation because main advertising spenders of TV and radio media are consumer product manufacturers, having a target mass market and having a persistent growth, as a result of growing economic and high competition in consumer product industries. In addition, the extension of economic as a whole and the change of society environment, from rural society to urban society, from sufficient society to consumption society have caused the higher competition and the entry of new advertisers resulting in growing of advertising
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spending. The risk that advertising spending will fall is very minimal and if happens, it would only be temporary. This is because the competition in advertising market is a factor to raise advertising money as well as media operated by BEC World group remains the most effective mean in reaching end-consumers main customers of majority advertisers.
• Market Share Maintaining
The market of BEC World’s major business overlaps in two dimensions as considered from the “Viewer” and the “Advertiser”. The channels are required to have the “Viewer” in order to be “Media”, as a result, it will then has the customers who are known as “Advertisers” using its service.
BEC World group continues to improve operating to be more efficient in order to draw more viewers than its competitors. However, whether the group can still maintain high rate of “Viewer” or enhancing its efficiency for consumers, are the risk factors despite of its success in improving efficiency of programs and sourcing. There is also competition risk with other operators, both old operators, improving their efficiency and new operators, acquiring new license to establish a new channel. In addition, audience of TV program may change to be viewer of new candidates. However, watching TV program is a behavior that seems to be habitual business. This allows the current successful operators to have more advantage than the new operators. Therefore, we believe that BEC World group may slightly have an effect from the aforesaid risk, even the “Viewer” may be distributed due to the diversity of channels and viewers.
Although the market share of the “Viewer” of BEC World group may decrease minimally owing to the “Viewer” distribution in relation to diversity of channels and preference, we believe that such decrease will not have any direct effect on BEC World group since this is a normal reaction, having an effect over most of operators in this business, except for the new operators who acquire more market share. This expansion of the viewer will expand to all market, not specifically focus on any specific business entity. Therefore, the operators who acquire more market share will only gain it slightly, which is not adequate to have the potential to compete with the BEC World’s current channels which still have the concentration of proportion of the “Viewer” higher than other operators. On the other hand, this could be a positive factor for the new channels of BEC World group which would expand to other market shares as the niche media, after previously focusing on being the mass media in the past.
With respect to market share of advertising business, due to the diversity of additional channels, there is a high possibility that BEC World group and most of the other operators in the same business will have a lower market share. However, BEC World group’s income is still stable since such diversity will raise more competition which means the amount of advertising money will soaring rapidly than before and this will benefit every business operator.
• Amendment of Broadcasting Operational Control
There is a risk from amending broadcasting operation control due to an establishment of independent regulatory body instead of government authority. However, BEC World group may have a little effect, since the Company was legally granted to renew its concession to operate under protection of transitory provision of the Constitution and related laws. Although, the industry is affected by Operation of Radio and Television Broadcasting Business Act, which has been effective since first quarter of 2008, by reducing advertising time. However, all operators in this industry confront the same problem; this shall not change any, competition in the industry.
• Renewal Operation Agreement
As the aforesaid independent entity has been just recently established and focused mainly on television business, together with the nature of short-term contracts which operate radio frequencies is granted on yearly basis, there is also a risk whether the group will be granted for renewal of operation of relevant radio frequencies. However, since the revenue generated from radio business is still small and the profitability is also
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low, the impact to the group is minimal if the group cannot carry on this business. However, the risk of TV business is lower than radio business, since the Company has its concession to further conduct its business until 2020. In addition, there is an advanced technology, changing “Analogue system”, currently system, to be “Digital system”, which TV program can be raised its efficiency to draw and provide good perception of end customer. Furthermore, subscribed TV services is accepted extensively due to the audience could access TV programs by setting up an equipment without paying service fees, resulting in increasing opportunities for TV program to reach viewers as well.
• Substitute of TV media by new advertisement
The risks from potential substitutes of TV media include electronic media such as internet; new TV media such as Satellite TV, Digital TV, etc.; BEC World group believes that, though there is more clear development in this area. However, there is no immediate impact on the operation of BEC World group from these new media in the near future especially in regard to selling advertising airtime. This is because advertising spending tends to concentrate on media which can effectively reach mass target group. Due to financial obligations whereby the end customers are required to increase their spending, and their habitual behavior, those new advertisements are only NICHE MARKET. In addition, main revenue of BEC World group comes from mass market position, and advertising budget, usually spent to media which can mainly reach target group of the advertiser. Similarly, impact on the group’s business from subscribed TV’s selling airtime as currently allowed by law is still small since the subscribed TV normally has small group of viewers which can be considered as niche market while free TV has viewer base throughout the country which is a mass market. Free TV advertising remains the most popular approach for consumer product manufacturers as the market sharing for Free TV remains quite high compared to other media. For other electronic media, such as, internet, although it has been new and become popular quickly, the access of users is limited and is regarded as a niche market as well. This new media is normally used as a supplementary media to free TV advertising and is only effective if the advertisers focus on niche market where mass market media may be too expensive for a small target market. These advertisers are not our main clients but they may establish new product/advertiser to raise competition in the market in the future which, eventually, will be benefit to BEC World group.
2) Risk of Operation and Management
• Holding Shares of the Company by a Group of Majority Shareholders
Since Maleenont family holds majority shares approximately 47.03% of BEC World’s total shares. Therefore, Maleenont family might be able to set management policy of the Company. However, the good corporate governance specified by the Company and other regulatory bodies could ensure and reduce such risk for minority shareholders. There are also some internal and external independent bodies supervising and auditing management and operation of the Company. Any transaction or resolution which is significant as specified by law, the Company always obtains a special resolution from shareholder’s meeting before proceeding. In light of the above, the aforesaid factors could ensure and secure risk of operation and management of the Company.
• Factors that may affect Operating Result and Financial Status in the Future
Most of the group’s operating costs and expenses do not directly relate to the revenue. They are either fixed or varied according to the market situation. It is believed that growth rate of costs and expenses of BECW group will be increased in accordance with inflation rate of our country, but it could be foreseen that the inflation rate would be quite low this year. Regarding the Thai Baht volatility, it might not cause serious affect to our business. The concern that the intense competition in the TV broadcasting business would increase the programming costs significantly is seemed to be exaggerated as the industry does not have problem on shortage of resources and the key success factor is not the competition for bidding for resource.
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Therefore, the group’s operating efficiency and profitability depends very much on its ability to generate revenue. Although the selling of advertising airtime, which is the main source of our revenue, depends largely on the growth of the overall advertising expenditure of the economy which is beyond the direct control of the group management. The market environment, which has been positive from recovery of macro-economic, government policies and recovery after great flooding, including the investment in large-size fundamental infrastructure of the country encourage advertisers to spend budget at a high rate throughout previous year. This represents a better opportunity of industry and BEC World group. Another factor is intense competitive environment which keeps growing high, it is thus our belief that the group’s profitability this year, 2013, will be improved further. As the group has a very strong capital structure with excellent liquidity without any problem of assets quality, there should be no financial problem of any kind.
13 (4) List of executives and top ten largest shareholders at the closing of the company share register
The list of the top ten largest shareholders as at August 23, 2013, at the latest closing of the company share registrar within the last fiscal year.
Name of the Shareholders NO. of Shares Held Percentage 1. MALEENONT GROUP * 940,600,000 47.03 2. CHASE NOMINEES LIMITED 42 188,837,870 9.4 4 3. THAI NVDR COMPANY LIMITED 116,811,977 5.84 4. THE HONGKONGAND SHANGHAI BANKING 75,190,925 3.76 CORPORATION LIMITED, FUND SERVICES DEPARTMENT 5. HSBC (SINGAPORE) NOMINEES PTE LTD 67,774,672 3.39 6. BNP PARIBAS SECURITIES SERVICES LUXEMBOURG 43,050,048 2.15 7. STATE STREET BANK EUROPE LIMITED 37,540,082 1.88 8. STATE STREET BANK AND TRUST COMPANY 33,012,522 1.65 9. GIC PRIVATE LIMITED - C 19,971,500 1.00 10. THE BANK OF NEW YORK (NOMINEES) LIMITED 19,780,916 0.99
Remark: * Detail of the Maleenont Group is as follows: 1. Mr. Prasan Maleenont holds 111,667,500 shares which is 5.58% 2. Mr. Pravit Maleenont holds 117,575,000 shares which is 5.88% 3. Mr. Prachum Maleenont holds 117,575,000 shares which is 5.88% 4. Ms. Ratana Maleenont holds 113,575,000 shares which is 5.68% 5. Ms. Nipa Maleenont holds 117,575,000 shares which is 5.88% 6. Ms. Amphorn Maleenont holds 115,175,000 shares which is 5.76% 7. Mrs. Ratchanee Nipatakusol holds 100,317,500 shares which is 5.02% 8. Ms. Tracy Ann Maleenont holds 78,570,000 shares which is 3.93% 9. Ms. Cathleen Maleenont holds 68,570,000 shares which is 3.43%
13 (5) Other information that may substantially affect the investors’ decision
-None-
Page 19 of 21 Supporting documents for AGM 2014, Agenda 3: Considering to ratify the participation of the auction for License to use Allocated Frequencies for National Commercial Digital Television Services and the execution of the Digital Television Network Services Agreement, including, the acquisition of related asset.
14. Board of Directors’ decision regarding the adequacy of revolving fund, in case of inadequacy and source of fund for such transaction
As business operation of BEC World group continually has the good overall operation for many years and the tendency of business will remain to have good liquidity; therefore, the source of fund for the business operation regarding national commercial Digital TV services of BECM will be the current fund from BEC World group first, and in case of in adequacy, it will take on a loan from commercial bank.
15. Substantial lawsuit or claim which is in progress
-None-
16. Interest or related transaction between the listed company and directors, executives and shareholders who hold shares whether directly or indirectly, from 10 percent upward
In 2013, there have been the transactions between the companies in BEC World group with the persons that may have conflict of interest as follows;
Persons that may Relationship Value of Transaction have Conflict of Transaction Interest (Million Baht ) Sport Art Company The close relatives of the 22 .1 5 Incomes have been derived from Limited company’s director are the major selling airtime to advertisers. shareholders in the company. Millionaire Property Maleenont Tower Co. Ltd, is major 131.33 Cost of service –it is the property fund unit holder in Millionaire Property lease which has no more than 3 fund, while the major shareholders years period and utility expense of Maleenont Tower Co. Ltd, are for the building which is used as the directors and executives of the broadcasting support. company. 131.08 Administrative expense – it is the property lease which has no more than 3 years period and utility expense for the building which is used as the office
17. Summary of the substantial agreements in the past 2 years
The execution of digital television network services agreement
Date of execution: February 10, 2014
Relevant parties:
Client: BECM, the subsidiary company, in which the Company holds 99.99% of shares.
Network Services Provider: Thai PBS
There are no relationship between Thai PBS and BECM which could be constituted as “a Connected Person ” under regulations of The Capital Market Supervisory Board and SET.
Page 20 of 21 Supporting documents for AGM 2014, Agenda 3: Considering to ratify the participation of the auction for License to use Allocated Frequencies for National Commercial Digital Television Services and the execution of the Digital Television Network Services Agreement, including, the acquisition of related asset.
Substantial of agreement: The Company agrees to use digital television broadcasting service through network services of Thai PBS for fulltime television signal broadcasting (24 hours per day, 7 days per week and 12 months per year), provided that such rental is for 1 high-definition channel and 2 standard-definition channels.
Period: The agreement will be expired on June 16, 2028.
Service fee: The network service fee for fulltime television signal broadcasting is as follows;
• Rental fee for network services for high-definition channel, in the amount of Baht 13.8 Million per month per channel (exclusive of VAT) • Rental fee for network services for standard-definition channels, in the amount of Baht 4.6 Million per month per channel (exclusive of VAT)
Thai PBS is entitled to adjust the service fee every 3 years, considering the inflation rate of the past year together with the notification of Bank of Thailand or the reliable financial institutions.
Term of Payment: The payment is for the yearly basis. The 1 st installment must be paid within 15 days upon availability of each Thai PBS station until December 31 of such year. The company will pay the service fee within January 15 for every following year.
18. The Board of Directors of BEC World Public Company Limited has reviewed and certified that information contained in this report is true and complete and will not cause any misunderstanding or lack of information that should be disclosed which may cause damage to the shareholders.
-Signature-
Sign ______(Mr. Prasan Maleenont) Authorized directors
-Signature- Sign ______(Ms. Ratana Maleenont) Authorized directors
Page 21 of 21
(Translation)
Opinion of the Independent Financial Advisor on Acquisition of Assets
In case of the auction for and subsequent acquisition of the spectrum license for digital television services of a subsidiary (BEC-Multimedia Co., Ltd.)
of
BEC World Public Company Limited
Prepared by
Advisory Plus Company Limited
March 31, 2014
Table of Contents
Executive Summary ...... 3
1. Nature and details of the transaction ...... 6
1.1 Type and size of the transaction ...... 6
1.2 Value of the assets being acquired and value of consideration ...... 8
1.3 Details of the assets being acquired ...... 10
2. Company profile ...... 15
2.1 Background ...... 15
2.2 Industry situation relating to television broadcasting business ...... 24
3. Reasonableness and benefits of the transaction to the listed company ...... 26
3.1 Reasonableness of the transaction ...... 26
3.2 Benefits of the transaction ...... 31
3.3 Impacts and risks from the transaction ...... 33
3.4 Adequacy of funding source for the asset acquisition ...... 36
4. Fairness of price and conditions for the transaction ...... 38
5. Conclusion of the Financial Advisor’s opinion ...... 46
AP. 038/2557 March 31, 2014
Subject Opinion of the Independent Financial Advisor on the acquisition of assets of BEC World Plc.
To Board of Directors and Shareholders BEC World Plc.
The meeting of the Board of Directors of BEC World Plc. (“the Company” or “BEC”) on March 13, 2014 passed a resolution approving to propose to the 2014 Annual General Meeting of Shareholders to consider and ratify the participation in the auction for and subsequent acquisition of the license to use allocated frequencies for national commercial digital television services1 (“Digital TV License”) at the total value of approximately Baht 6,471 million (exclusive of VAT) and the entering into Digital Terrestrial Television Network Services Agreement (“Network Services Agreement”) with Thai Public Broadcasting Service (“Thai PBS”) at the total value of Baht 3,795.55 million (exclusive of VAT), including the acquisition of related assets from investment in studio construction and procurement of equipment for digital TV broadcasting at the total value of approximately Baht 1,000.20 million by BEC-Multimedia Co., Ltd. (“BECM”), a 99.99%-owned subsidiary of BEC. On December 26 and 27, 2013, BECM participated in the auction for the Digital TV License organized by the National Broadcasting and Telecommunications Commission (“NBTC”). On January 13, 2014, BECM received a letter dated January 10, 2014 from the NBTC notifying results of the auction and confirming that BECM won the bid for the Digital TV License in three categories as follows:
1) High-Definition Variety Category2 at a bid price of Baht 3,530 million (exclusive of VAT); 2) Standard-Definition Variety Category3 at a bid price of Baht 2,275 million (exclusive of VAT); 3) Standard-Definition Kids and Family Category at a bid price of Baht 666 million (exclusive of VAT); Making up a total bid price of Baht 6,471 million (exclusive of VAT).
1 The license to use allocated frequencies for national commercial digital television broadcasting is the type of broadcasting that allows the audience to view TV programs in general without any service conditions and is accessible in all parts of the country. 2 High Definition (HD) is, according to NBTC Notification Re: Technical Standard for Digital Terrestrial Television Receiver, defined as an interlace-scanned format of 1920X1080 pixels interlaced (1080i) with frame rate of 25 frames/sec and aspect ratio of 16:9 or 1280X720 pixels progressive (720p) with frame rate of 50 frames/sec and aspect ratio of 16:9. 3 Standard Definition (SD) is, according to NBTC Notification Re: Technical Standard for Digital Terrestrial Television Receiver, defined as an interlace-scanned format of 720x576 pixels interlaced (576i) with frame rate of 25 frames/sec and aspect ratio of 16:9 and 4:3. Opinion of the Independent Financial Advisor on acquisition of assets
The Company already disclosed, by a letter dated January 14, 2014, the information on BECM winning of the auction to general investors through the information disclosure system of the Stock Exchange of Thailand (“SET”). In such letter of confirmation from the NBTC, BECM is required to fulfill three preconditions, which it has already completed, as follows:
1) BECM shall pay for the first installment of the License fees and place a guarantee to secure the remaining fee payment, both being VAT included. On February 10, 2014, BECM paid the first installment of the License fees in the amount of Baht 1,561.24 million (VAT included) and provided a letter of guarantee from Bangkok Bank Plc. in the amount of Baht 5,362.73 million (equal to the unpaid balance of the fees and inclusive of VAT) to the NBTC.
2) BECM shall apply for rental of the digital television network services from a service provider within 30 days. On February 10, 2014, BECM entered into the Digital Terrestrial Television Network Services Agreement with Thai PBS for one HD channel and two SD channels, valid from April 1, 2014 to June 2028 according to Thai PBS’s network service license term. The rental fees payable after completion of network service station installation across the country by Thai PBS from June 2015 onwards are equal to Baht 13.80 million/month/1 HD channel and Baht 4.60 million/month/1 SD channel, or a total value throughout the term of the Network Services Agreement of Baht 3,795.55 million (exclusive of VAT). The said rental fees could be adjusted upward according to the inflation rate in the future.
The entering into the long-term Network Services Agreement with Thai PBS not only is required to be accomplished in order to obtain the License, but also can ensure that the Company’s television signal will reach viewers across the country efficiently in both HD and SD formats. The service quality will be monitored and controlled to meet the quality standards regulated by the NBTC.
3) BECM shall file an application for a broadcasting business license within 45 days from the date of receiving the letter of confirmation as the bid winner. On February 21, 2014, BECM already filed such application.
By taking the above actions, BECM can be deemed to have completely fulfilled the preconditions for the Digital TV License. The investment in digital television business under this transaction, entailing the acquisition of the Digital TV License, the entering into the Network Services Agreement and the investment in studio and television equipment with a total transaction value of Baht 11,266.75 million (exclusive of VAT), is deemed as a significant asset acquisition transaction pursuant to the Notification of the Capital Market Supervisory Board No. ThorJor. 20/2551 Re: Rules on Entering into Material Transactions Deemed as Acquisition or Disposition of Assets and the Notification of the Board of Governors of the SET Re: Disclosure of Information and Other Acts of the Listed Company Concerning the Acquisition or Disposition of Assets, B.E. 2547, and the subsequent amendments (collectively called the “Acquisition or Disposal Notification”). The highest value of the transaction, when calculated from the total consideration paid, is equal to 92.38% of total asset value of BEC and its subsidiaries according to the Company’s consolidated financial statements ended December 31, 2013. Therefore, the proposed transaction falls under Class 1 Transaction with transaction size higher than 50% but less than 100%, whereby the Company is obligated to prepare a report and disclose information on the transaction to the SET and to arrange a shareholders’ meeting to seek approval for the entry into the transaction in accordance with the rules on request for approval from shareholders’ meeting.
Nonetheless, pursuant to the NBTC Notification regarding Criteria and Procedures on the Licensing of Allocated Frequencies for National Commercial Digital Television Services B.E. 2556 and the NBTC Notification regarding Criteria and Procedures on the Licensing of Broadcasting Services B.E. 2555, it is stipulated that the licenses for use of allocated frequencies for commercial
- 2- Opinion of the Independent Financial Advisor on acquisition of assets digital television services must be granted by an auction process. As such, the Company could not know in advance as to whether BECM will win such auction and which categories of the Digital TV License it will win the bid for. The Company therefore could not propose the participation in the said auction and the transaction value for prior approval from the shareholders’ meeting in accordance with the Acquisition or Disposal Notification. As a result, the Company will have to propose the acquisition of the Digital TV License and related assets for ratification by the 2014 Annual General Meeting of Shareholders, to be held on April 28, 2014, with a required affirmative vote of not less than three-fourths of the total votes of shareholders attending the meeting and having the right to vote, excluding shareholders who have an interest in the transaction. However, none of the Company’s shareholders have an interest in and are not entitled to cast vote on this transaction. Therefore, the entering into this transaction is not considered as a connected transaction pursuant to the Notification of the Capital Market Supervisory Board No. ThorJor. 21/2551 and the Notification of the SET Re: Disclosure of Information and Act of Listed Companies Concerning the Connected Transactions, B.E. 2546.
The notice of the shareholders’ meeting is required to be accompanied by opinion from an independent financial advisor regarding (1) reasonableness and benefits of the transaction to the listed company, (2) fairness of price and conditions for the transaction, and (3) recommendation as to whether the shareholders should vote for or against the transaction together with reasons thereof. In this respect, the Company has appointed Advisory Plus Co., Ltd. as the independent financial advisor (“Financial Advisor”) to render opinion to the Company’s shareholders regarding the entry into the transaction.
In conducting an analysis and providing opinion herein, the Financial Advisor has considered information and documents obtained from the Company together with publicly available information such as resolutions of the Company’s Board of Directors and Information Memorandum regarding the transaction, annual registration statement (Form 56-1), an auditor’s report, financial statements, financial projection and relevant assumptions, notifications of the NBTC pertaining to the digital television business, the Network Services Agreement, and other documents supplied by the Company, as well as from interviews with BEC management and assessment of industry situation and other relevant economic factors.
The opinion rendered herein is based on the assumption that all information and documents available from the Company and the information derived from the interviews with its management are reliable, correct and complete without any change or revision thereto after we have received the information. Thus, we cannot certify or guarantee the accuracy or completeness of the information obtained from the Company and concerned parties. Our consideration is, moreover, based on the economic environment and the information prevailing at the time of preparing this study only. As such, if there is any significant change in these factors, it will likely have a material impact on the Company and the proposed transaction and may cause a significant change in our opinion, the financial projection and net cash flow analysis of BECM as well as affect the shareholders’ decision. Therefore, we cannot affirm whether there will be any material impact on the Company in the future. Our opinion can be summed up as follows:
Executive Summary
The meeting of the Board of Directors of BEC on March 13, 2014 passed a resolution approving to propose to the shareholders’ meeting to consider and ratify the participation in the auction for and subsequent acquisition of the Digital TV License, the entering into the Network Services Agreement, and the acquisition of related assets by BECM, a 99.99%-owned subsidiary of BEC. On December 26 and 27, 2013, BECM participated in the auction and won the bid for the Digital TV License in three categories, HD Variety, SD Variety and Kids & Family, at the total bid price of Baht 6,471 million (exclusive of VAT).
- 3- Opinion of the Independent Financial Advisor on acquisition of assets
To fulfill the preconditions for the Digital TV License, BECM on February 10, 2014, entered into the Network Services Agreement with Thai PBS for one HD channel and two SD channels, with service fees chargeable from April 1, 2014 until June 16, 2028 totaling approximately Baht 3,795.55 million (exclusive of VAT). In addition, BECM will invest in studio construction and procurement of equipment for digital television broadcasting in the amount of Baht 1,000.20 million (exclusive of VAT).
The proposed transaction, entailing the acquisition of the Digital TV License, the entering into the Network Services Agreement and the investment in studio and television equipment with a total transaction value of Baht 11,266.75 million (exclusive of VAT), is deemed as asset acquisition transaction pursuant to the Acquisition or Disposal Notification. The highest value of the transaction, when calculated from the total consideration paid, is equal to 92.38% according to the Company’s consolidated financial statements ended December 31, 2013. Therefore, the proposed transaction falls under Class 1 Transaction, whereby the Company is obligated to prepare a report and disclose information on the transaction to the SET and to arrange a shareholders’ meeting to seek approval for the entry into the transaction.
Nonetheless, pursuant to the NBTC Notification regarding Criteria and Procedures on the Licensing of Allocated Frequencies for National Commercial Digital Television Services B.E. 2556 and the NBTC Notification regarding Criteria and Procedures on the Licensing of Broadcasting Services B.E. 2555, it is stipulated that the licenses for use of allocated frequencies for commercial digital television services must be granted by an auction process. As such, the Company could not know in advance as to whether BECM will win such auction and which categories of the Digital TV License it will win the bid for. The Company therefore could not propose the participation in the said auction and the transaction value for prior approval from the shareholders’ meeting in accordance with the Acquisition or Disposal Notification. As a result, the Company is obligated to prepare a report and disclose information on the transaction to the SET and to hold a shareholders’ meeting to ratify the entering into such transaction. The Company will propose the said transaction to the 2014 Annual General Meeting of Shareholders, to be held on April 28, 2014, for ratification with a required affirmative vote of not less than three-fourths of the total votes of shareholders attending the meeting and having the right to vote, excluding shareholders who have an interest in the transaction. However, none of the Company’s shareholders have an interest in and are not entitled to cast vote on this transaction. Therefore, the entering into this transaction is not considered as a connected transaction pursuant to the Notification of the Capital Market Supervisory Board No. ThorJor. 21/2551 and the Notification of the SET Re: Disclosure of Information and Act of Listed Companies Concerning the Connected Transactions, B.E. 2546.
The asset acquisition transaction entered into by BECM, entailing the bid for and acquisition of the Digital TV License, the entering into the Network Services Agreement and the investment in studio and television equipment that are of high efficiency and compatible with the digital television system with the total transaction value of Baht 11,266.75 million, is deemed essential and appropriate and will help to ensure business continuity for the Company. This is because the Company generates income mainly from sales of advertising through Thai TV Channel 3 (“Channel 3”) which is operated under the concession agreement between its subsidiary (the Bangkok Entertainment Co., Ltd.) and MCOT Plc. and such concession will expire in March 2020. At the same time, the NBTC organized an auction for licenses to use allocated frequencies for national commercial digital television broadcasting services on 24 channels for a term of 15 years. This will be a good opportunity to enhance business continuity and expand BEC World Group business into new TV channels that could broaden the viewership base, in addition to the current analog TV broadcasting system, thus helping to strengthen business growth and potential and increase value added and favorable returns for shareholders in the long term.
The Company will gain benefits from the entry into this transaction, comprising an enhanced business continuity after the end of right to operate Channel 3 upon expiration of the concession agreement between the subsidiary and MCOT; new income-earning sources through the
- 4- Opinion of the Independent Financial Advisor on acquisition of assets three additional TV channels; an increase of employee satisfaction with career advancement opportunities along with growth of the new TV channels; a more efficient use of existing resources and content; better customer servicing; an increase in market share in niche market media as propelled by more diverse services offered through the new TV channels that will be differentiated from the existing channel; a broader and stronger reach to the audience through the developed nationwide network system and the NBTC’s policy to promote the public’s access to the digital TV broadcasting; and an increase in value added and favorable returns for shareholders in the long run.
However, the entering into this transaction could cause some adverse impacts and risks to the Company, including risk from loss incurred at the initial period of investment, risk from return on investment not coming out as projected which may affect overall performance of the Company and dividend receivable by shareholders in the future, and risk from lowered liquidity and from liabilities arising from the obligation to pay the high-valued Digital TV License fees.
The Company is also exposed to risk from failure to obtain ratification from the shareholders for the entry into the asset acquisition transaction which has already been executed. This will subsequently lead BECM to be unable to operate business under the Digital TV License and BECM will thereby be deemed to have breached the agreement made with the NBTC. In this case, it may not request a refund of the first installment of the Digital TV License fees already paid to the NBTC and is still obliged to completely pay the remainder of the fees in accordance with the obligation set forth in the letter of guarantee placed with the NBTC. As such, it will lose funds paid for the Digital TV License fees in an amount equal to the bid price plus VAT, or totaling Baht 6,923.97 million (Baht 6,471 million + 452.97 million) and could also face a lawsuit demanding payment for any other damage claims. With respect to the Network Services Agreement, the bank guarantee placed under such agreement may be confiscated and BECM will be obligated to pay the remainder of the service fees to Thai PBS.
As regards the adequacy of funding source for the transaction amounting to Baht 11,266.75 million in total, the Company will render financial support to BECM. In view of the Company’s current financial position and the cash flow from BECM’s future operation, and the payment for the acquired assets which is set to be made in installments as per the payment schedule already set forth, we are of the opinion that the Company has an adequate source of funds for this transaction. If there is no need for borrowing, the Company will consider utilizing funds entirely from its internal working capital. Thus, it will not bear any debts and interest expenses from borrowing from external financing sources.
To identify reasonableness of the transaction price, we have analyzed and compared the investment cost of the digital TV business with the total cash flow to be received from such investment. According to a projection of cash flow from such business undertaking by BECM over a period of 15 years from the first date of digital broadcasting (April 1, 2014 - March 31, 2029), the net present value of cash flow is estimated at Baht 23,236 million, with internal rate of return (IRR) of 46.25% per year and payback period of 6.49 years. Such IRR is higher than the cost of equity, or Ke, which is equal to 13.28% (Ke is the average of overall rate of return expected by shareholders from their current investments in the Company’s shares, which have not yet included the digital TV business, a new line of business to be undertaken in the future). The said rate of return from this project is therefore considered favorable. However, from a sensitivity analysis on changes in the average advertising rate and cost of program production (10% increase/decrease), the net present value of cash flow is estimated in a range of Baht 11,137 million - 39,095 million, with IRR of 28.87% - 66.37%, which is higher than Ke of 13.28%, and payback period of 4.85 - 7.68 years.
Moreover, we are of the opinion that the conditions for the transaction are fair and do not cause the Company to lose any benefits. The conditions pertaining to the Digital TV License are conditions prescribed under the NBTC’s Notification Regarding Rules and Procedures for Approval of the Use of Spectrum for Digital Television Broadcasting Services and other relevant notifications that must be adhered to by all licensees on an equitable basis. Likewise, the conditions under the
- 5- Opinion of the Independent Financial Advisor on acquisition of assets
Network Services Agreement, including the determination of service fees and a possible decrease or change of service fees in the future based on inflation rate or subject to the NBTC’s approval, are deemed fair and equitable for all parties.
Based on the above rationale, we view that the shareholders will gain benefits from the proposed transaction and that the transaction is reasonable with a fair price and fair conditions. Therefore, it is recommended that the shareholders should give ratification for the asset acquisition transaction.
In deciding whether to give such ratification, the shareholders can consider the reasons and opinion of the Financial Advisor as described above. The final decision primarily depends on the individual shareholders’ judgment.
1. Nature and details of the transaction
1.1 Type and size of the transaction
BEC World group of companies have engaged in two main businesses: 1) broadcasting and media and 2) program sourcing/production and distribution and supporting businesses. It primarily earns income from sales of advertising through “Channel 3” TV station which is operated under the concession agreement between the Bangkok Entertainment Co., Ltd., its subsidiary, and MCOT Plc. The group is entitled to operate “Channel 3” until March 2020. The NBTC issued the Notification regarding Criteria and Procedures on the Licensing of Allocated Frequencies for National Commercial Digital Television Services B.E. 2556 and then on December 26 and 27, 2013 organized an auction for licenses to use allocated frequencies for national commercial digital television broadcasting services on 24 channels for a term of 15 years.
In order not to lose the opportunity and to ensure uninterrupted operation of BEC World Group’s broadcasting business, its core activity, as well as to expand the broadcasting business to cover a wider range of viewership, in addition to the current analog TV broadcasting system, which will help to strengthen business growth and potential including business stability and continuity after expiry of the concession agreement for “Channel 3” in 2020, it was necessary for BECM to participate in the auction so as to acquire the Digital TV License for operation of national commercial digital television services. There are three essential components in order to operate business under such license:
1) Being a grantee of the license to use allocated frequencies for national commercial terrestrial digital television broadcasting services.
On January 13, 2014, BECM received a letter dated January 10, 2014 from the NBTC confirming that BECM was the bid winner for the Digital TV License in three categories at the total bid price of Baht 6,471 million (exclusive of VAT). BECM is obligated to pay for the bid price, which is the fee for 1) HD variety channel license of Baht 3,530 million; 2) SD variety channel license of Baht 2,275 million; and 3) kids and family channel license of Baht 666 million.
In such letter from the NBTC, BECM was notified to fulfill three preconditions as follows: 1) pay for the first installment of the License fees and place a guarantee to secure the remaining fee payment, both being VAT included, 2) apply for rental of the digital terrestrial television network services from an authorized service provider within 30 days from the date of receiving the letter of confirmation as the bid winner, 3) file an application for a broadcasting business license within 45 days from the date of receiving the letter of confirmation as the bid winner. After BECM completely fulfills the preconditions, the NBTC will consider issuing and granting the “Digital TV License”
- 6- Opinion of the Independent Financial Advisor on acquisition of assets
together with the “Broadcasting Business License” to BECM within 90 days from the application filing date by BECM (BECM has currently fulfilled all of the said preconditions).
On February 10, 2014, BECM paid the first installment of the License fees for all three categories in the total amount of Baht 1,561.24 million (VAT included) and provided a letter of guarantee against the unpaid balance of the fees in the amount of Baht 5,362.73 million (VAT included) to the NBTC.
On February 21, 2014, BECM filed the application for a broadcasting business license for all three categories to the NBTC.
2) Being a rentee of the digital television network services provided by the NBTC’s licensed network service provider.
On February 10, 2014, BECM entered into the Digital Terrestrial Television Network Services Agreement with Thai PBS for one HD channel and two SD channels, with rental fees chargeable from April 1, 2014 until June 16, 2028,4 payable on a yearly basis. The rental fees payable after completion of network service station installation across the country from June 2015 onwards are equal to Baht 13.80 million/month/1 HD channel and Baht 4.60 million/month/1 SD channel, or a total value throughout the term of the Network Services Agreement of Baht 3,795.55 million (exclusive of VAT). The said rental fees could be adjusted upward according to the inflation rate in the future.
3) Investing in procurement of television equipment and studio for production and transmission of television signal to the service provider for further broadcasting to all parts of the country.
BECM plans to rent a space and renovate the premises for constructing studio and to procure digital television equipment at the total cost of Baht 1,000.20 million (exclusive of VAT). The studio and television equipment will be procured from general suppliers which have no relationship with BECM in the manner of a connected party as defined in notifications of the Capital Market Supervisory Board and the SET.
The proposed transaction, entailing the acquisition of the Digital TV License, the entering into the Network Services Agreement and the investment in studio and television equipment with a total transaction value of Baht 11,266.75 million, is deemed as asset acquisition transaction pursuant to the Acquisition or Disposal Notification. The highest value of the transaction, when calculated from the total consideration paid, is equal to 92.38% of total asset value of the Company according to the Company’s consolidated financial statements as at December 31, 2013. Therefore, the proposed transaction falls under Class 1 Transaction, whereby the Company is obligated to prepare a report and disclose information on the transaction to the SET and to arrange a shareholders’ meeting to seek approval for the entry into the transaction.
Nonetheless, pursuant to the NBTC Notification regarding Criteria and Procedures on the Licensing of Allocated Frequencies for National Commercial Digital Television Services B.E. 2556 and the NBTC Notification regarding Criteria and Procedures on the Licensing of Broadcasting Services B.E. 2555, it is stipulated that the licenses for use of allocated frequencies for commercial digital television services must be granted by an auction process. As such, the Company could not know in advance as to whether BECM will win such auction and which categories of the Digital TV
4 The Network Services Agreement between BECM and Thai PBS will expire on June 16, 2028, which is ahead of the expiry of the Digital TV License in 2029. This is because the NBTC issued the license to Thai PBS to provide the national digital terrestrial television network services in 2013 for a 15-year term ended in 2028.
- 7- Opinion of the Independent Financial Advisor on acquisition of assets
License it will win the bid for. The Company therefore could not propose the participation in the said auction and the transaction value for prior approval from the shareholders’ meeting in accordance with the Acquisition or Disposal Notification. The Company accordingly has to propose the acquisition of the Digital TV License and related assets to the shareholders’ meeting for ratification.
The Board of Directors’ meeting on March 13, 2014 resolved to propose this transaction to the shareholders’ meeting to give ratification and to prepare a report and disclose information on the transaction to the SET. The Company will propose the entry into this transaction to the 2014 Annual General Meeting of Shareholders, to be held on April 28, 2014, for ratification with a required affirmative vote of not less than three-fourths of the total votes of shareholders attending the meeting and having the right to vote, excluding shareholders who have an interest in the transaction. However, none of the Company’s shareholders have an interest in and are not entitled to cast vote on this transaction. Therefore, the entering into this transaction is not considered as a connected transaction pursuant to the Notification of the Capital Market Supervisory Board No. ThorJor. 21/2551 and the Notification of the SET Re: Disclosure of Information and Act of Listed Companies Concerning the Connected Transactions, B.E. 2546.
Details of calculation of the transaction size are shown below:
Calculation Formula Transaction size method Total value of Consideration paid *100% 11,266.75 = 92.38% consideration Total assets of BEC 12,196.07 * Calculation is based on total assets of BEC and its subsidiaries as at December 31, 2013 as shown on the consolidated financial statements for the year ended December 31, 2013.
1.2 Value of the assets being acquired and value of consideration
Under this transaction, BECM will acquire the Digital TV License, the right to use the network services from Thai PBS and the assets from investment in construction of studio and procurement of equipment for digital television broadcasting at the total value of Baht 11,266.75 million, details of which are as described below:
(1) The license to use allocated frequencies for national commercial digital television services in three categories, i.e. HD Variety, SD Variety, and Kids and Family Categories, from the NBTC for a term of 15 years at the total winning bid price of Baht 6,471 million (exclusive of VAT).
(2) Right to use the digital terrestrial television network services under the terms and conditions set forth in the Network Services Agreement signed by BECM with Thai PBS for one HD channel and two SD channels for fulltime television signal broadcasting, valid from April 2014 to June 2028. The rental fees payable after completion of network service station installation across the country by Thai PBS from June 2015 onwards are equal to Baht 13.80 million/month/1 HD channel and Baht 4.60 million/month/1 SD channel, or a total value throughout the term of the Network Services Agreement of Baht 3,795.55 million (exclusive of VAT). The said rental fees could be adjusted upward according to the inflation rate in the future.
(3) Investment in procurement of studio and digital television equipment in a total amount of approximately Baht 1,000.20 million (exclusive of VAT).
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Value of consideration Unit: Baht million No. Items Value of consideration 1 Digital TV License fees 6,471.00 2 Digital TV network service fees 3,795.55 3 Investment in studio and equipment 1,000.20 Total 11,266.75
Details and terms of payment for the Digital TV License fees and network service fees
(1) Digital TV License fees for three categories at a total value of Baht 6,471 million
The reserve price of the auction is Baht 2,030 million in total, comprising - HD Variety Category with the reserve price of Baht 1,510 million; - SD Variety Category with the reserve price of Baht 380 million; and - SD Kids and Family Category with the reserve price of Baht 140 million.
The terms of payment for the fees are as follows:
Install Payment terms Fees out of the reserve Fees out of the excess of Total fees ment price reserve price (Bt. million) no. % of Amount % of Amount reserve (Bt. reserve (Bt. price million) price excess million) Auction deposit 10.00% 203.00 203.00 1 Within 30 days of receipt of 40.00% 812.00 10.00% 444.10 1,256.10 letter of confirmation as bid (net of auction deposit of (net of auction winner (paid on Feb 10, Baht 203 million) deposit of Baht 203 2014) million) 2 Within 30 days after the end 30.00% 609.00 10.00% 444.10 1,053.10 of first year from the date of obtaining the License 3 Within 30 days after the end 10.00% 203.00 20.00% 888.20 1,091.20 of second year from the date of obtaining the License
4 Within 30 days after the end 10.00% 203.00 20.00% 888.20 1,091.20 of third year from the date of obtaining the License 5 Within 30 days after the end - - 20.00% 888.20 888.20 of fourth year from the date of obtaining the License 6 Within 30 days after the end - - 20.00% 888.20 888.20 of fifth year from the date of obtaining the License 2,030.00 4,441.00 6,471.00 Note: 1. The License fees above are exclusive of VAT. 2. Upon payment of each installment, a bank guarantee must be placed against the unpaid balance of the fees. The outstanding guarantee amount will be reduced according to the accumulated amount of fees paid. As of February 10, 2014, which was the date the first installment was paid by BECM, a bank guarantee was placed in the amount of Baht 5,362.73 million (equal to the unpaid balance of the fees plus VAT).
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In addition, BECM is obliged to pay an “annual License fee” at 2% of revenues before expenses and a “yearly contribution” to the Broadcasting and Telecommunications Research and Development Fund for the Public Interest at 2% of revenues before expenses earned directly and indirectly from advertisements and other revenues from services provided under the License, without limit to the minimum or maximum amount payable to the NBTC.
(2) Digital television network rental fees
BECM will pay rental fees under the Network Services Agreement to Thai PBS over a term of 14 years, 2 months and 16 days, or from April 1, 2014 to June 16, 2028, payable on a yearly basis. The rental fees payable after completion of network service station installation across the country by Thai PBS5 from June 2015 onwards are equal to Baht 13.80 million/month/1 HD channel and Baht 4.60 million/month/1 SD channel, or a total value throughout the term of the Network Services Agreement of Baht 3,795.55 million (exclusive of VAT). The said rental fees could be revised by Thai PBS every three years based on the inflation rate of the foregoing year and as announced by the Bank of Thailand or reliable financial institution.
In the event that Thai PBS has not yet completed the installation of network stations as set forth in the Agreement, it will collect the fees at the rate specified for the stations already installed and will send an invoice, notifying the amount of fee due plus VAT, to BECM. BECM must pay the first installment within 15 days from the date Thai PBS is ready to provide services at each station until December 31 of that year and pay the following installments in the following years by the 15th of January of each year. Thai PBS must install 24 network stations in year 1 (2014) and 39 stations (which include the stations installed in year 1) in year 2 (2015).
In this regard, BECM has provided a letter of guarantee worth Baht 124.03 million to Thai PBS against its performance of obligations under the Agreement. If any party breaches any of the conditions under the Agreement, the other party is entitled to terminate the Agreement by so notifying the defaulting party in writing at least three months before the proposed date of Agreement termination. If BECM breaches the Agreement, it agrees to such guarantee being confiscated by Thai PBS or being demanded from the guarantor bank. BECM must pay for the outstanding balance of such fees plus VAT to Thai PBS until expiry of the Agreement.
(3) Value of studio and equipment
To operate the digital TV business, BECM must invest in renovation of premises for constructing studio and procurement of digital television equipment that are of high efficiency and compatible with the system. The total investment cost is approximately Baht 1,000.20 million or an average of Baht 333.40 million/channel. Payment will be made upon completion of work or delivery of products.
1.3 Details of the assets being acquired
In this transaction, BECM, a subsidiary of BEC, will acquire three items of assets as follows:
1. Three licenses to use allocated frequencies for national commercial digital television services, comprising 1) HD Variety Channel License, 2) SD Variety Channel License, and 3) Kids and Family Channel License.
BECM has completely fulfilled the preconditions, including 1) payment for the first installment of the License fees and provision of guarantee for the unpaid balance of the
5 In the event that Thai PBS has not yet completed the installation of network stations as set forth in the Agreement, it will collect the fees at the rate specified for the stations already installed only.
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fees; 2) entering into the Network Services Agreement with Thai PBS, which is the licensed digital terrestrial television network service provider; and 3) filing of an application for the broadcasting business license on February 21, 2014. The NBTC will consider issuing and granting the Digital TV License together with the broadcasting business license to BECM within 90 days from the application filing date by BECM.
2. The Digital Terrestrial Television Network Services Agreement with Thai PBS for transmission of television signal for further broadcasting all over the country during April 1, 2014 - June 16, 2028 (Thai PBS is granted the broadcasting business license to provide the national digital terrestrial television network services for 15 years from June 17, 2013 to June 16, 2028).
3. Assets acquired from investment in renting of a space and renovation of the premises for constructing studio and procurement of digital television equipment that are highly efficient and compatible with the system, including television broadcasting equipment and computer software for content production such as Enterprise MAM+MCR system, communication system, IT service, graphic, content production equipment, outside broadcasting equipment, electricity system, etc., involving a total investment cost of Baht 1,000.20 million or an average of Baht 333.40 million/channel.
Details of the above assets are as follows:
(1) Digital TV License
Grantor : The National Broadcasting and Telecommunications Commission (“NBTC”) Grantee : BEC-Multimedia Co., Ltd. (“BECM”)
License term : 15 years Scope of : Pursuant to the NBTC Notification Re: Rules for General Service Television operation Broadcasting, BECM must broadcast television programs of the same content under the through all platforms in both terrestrial and satellite systems on a continuous basis License without barring any access to such broadcasting, whether in whole or in part (Must Offer Rule). Under the NBTC Notification Re: Rules and Procedures for Approval of Broadcasting Service B.E. 2555, Chapter 2, rights and duties of the licensees are stipulated as follows: 1. News or information programs for public interest must constitute at least 25.00% of total programs broadcast. 2. The licensees must operate the business themselves, but may allocate some of the airtime for rent to other parties in accordance with the regulations set forth. 3. The licensees must commence the television broadcasting operation within 30 days after obtaining the License. 4. The licensees may not broadcast any programs other than the pre-determined programs unless they have notified the NBTC officials of a change of the programs at least seven days in advance or there is any reasonable ground. 5. The licensees may generate income from advertising and business service provision in the maximum amount of 12 and a half minutes per hour, whereby the total amount of time for advertisements and business service provision for a whole day shall not exceed an average of 10 minutes per hour. 6. The licensees must pay the annual License fee at 2% of revenues before expenses and the yearly contribution to the Broadcasting and Telecommunications Research and Development Fund for the Public Interest
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at 2% of revenues before expenses directly and indirectly earned from advertisements and other related revenues. 7. When the License expires, the licensees may re-apply for the License at least 180 days before expiry date of the original License. The term of the new License may be different from the original License term. Preconditions The NBTC Notification Re: Rules and Procedures for Approval of the Use of Spectrum for Digital Television Broadcasting Services B.E. 2556 prescribes the preconditions for all licensees as follows: 1. The licensees shall apply for and obtain the right to use terrestrial digital television network service from the authorized provider of terrestrial digital television network services within 30 days from the date the NBTC resolves to designate them as the licensees or as the bid winners for the License. (BECM has already fulfilled this condition.) 2. The licensees shall commence the broadcasting services according to the service plan or investment plan within 30 days from the date of obtaining the License from the NBTC. (BECM already complied with all conditions and is awaiting the issuance of the License by the NBTC.) In the event that the applicant who has been designated by the NBTC as the licensee or as the bid winner for the License fails to fulfill the requirement by the specified period in the first paragraph, it shall be deemed as having renounced the right to the License and may not request a refund of all fees incurred from the application for the License. 3. For the applicant who has been designated by the NBTC as the licensee or as the bid winner for the License and has fulfilled the conditions in 1 and 2 and been approved by the NBTC, the NBTC shall issue the License to use allocated frequencies for the category of digital television services as specified by the NBTC. The licensee shall have the right to use allocated frequencies under the spectrum plan for digital terrestrial television services jointly with other licensee in compliance with the conditions stipulated by the NBTC. After obtaining the License from the NBTC, it shall be deemed to also receive a license to operate broadcasting services under the law governing broadcasting business. Rights and : Under the NBTC Notification Re: Rules and Procedures for Approval of the Use duties of the of Spectrum for Digital Television Broadcasting Services B.E. 2556, the licensees licensees shall have the rights and duties as follows: 1. The licensees must completely meet the qualifications specified in the NBTC Notification Re: Rules and Procedures for Approval of Broadcasting Service throughout the license term. That is, they must have the qualifications specified in Section 8, Section 14, Section 15 and Section 25 of the Broadcasting Business Act B.E. 2551 and must possess qualifications and not have disqualifications as follows: (1) The licensees must not be a bankrupt or be placed under a receivership or business reorganization by a court order under the bankruptcy law. (2) The directors or persons authorized to act on behalf of the licensees must not be listed as unsuitable executives according to the regulations of the Stock Exchange of Thailand. (3) The licensees, the directors, managers or persons authorized to act on behalf of the licensees must never have been given a criminal sentence by a final court judgment, during the two-year period prior to the application submission date, for an offence committed under the law on broadcasting business, the law on radiocommunication, the law on telecommunications
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business, the law on trade competition, the law on information, the law on intellectual property, the law on narcotics, predicate offence under the law on anti-money laundering, offence related to officials under the Criminal Code, offence under the law on placing of bids to state agencies, and offence under the organic law on corruption prevention and suppression. 2. The licensees must adhere to the licensing scope and conditions specified in the NBTC Notification Re: Rules and Procedures for Approval of Broadcasting Service. 3. The License to use allocated frequencies for digital television services is an exclusive right granted to the individual licensees and may not be transferred. The licensees must use the allocated frequencies for digital television business operation by themselves and may not assign the management, in whole or in part, to other party, nor delegate the power to other party to operate the business on their behalf, nor to assign right to the License, in whole or in part, to other party which will cause an effect on the licensed business, but may allocate and lease some of the airtime to other operator in accordance with the regulations stipulated by the NBTC. 4. In the event that the licensees wish to change to other digital television network, they must obtain approval from the NBTC for a change in the use of allocated frequencies at least 180 days in advance. 5. The licensees must pay the annual License fee at the rate and under the procedures specified by the NBTC. The licensees who fail the pay such fee or pay the fee later than the specified deadline are subject to an additional fee at the rate specified by the NBTC (7.50% of the pass due amount). Failure to make such fee payment within 15 business days from the due date will result in the License being nullified as from the date immediately following the due date of the License fee. The licensees must then fulfill all conditions specified by the NBTC before dissolution of their business. 6. The licensees must strictly comply with the conditions set forth in the License by the NBTC. 7. The License to use allocated frequencies for digital television services shall be valid for a period specified by the NBTC but not longer than 15 years. 8. If, after expiry of the License, the licensees wish to reapply for the use of allocated frequencies for digital television services, they must file an application for the License to the NBTC in accordance with the criteria and procedures stipulated under this Notification.
(2) The Terrestrial Digital Television Network Services Agreement
Agreement : Thai Public Broadcasting Service (“Thai PBS”) parties : BEC-Multimedia Co., Ltd. (“BECM”) Key : 1. BECM agrees to use the terrestrial digital television network services conditions and (“Network Services”) of Thai PBS for full-time television broadcasting scope of for a term of 15 years from April 1, 2014 to June 16, 2028. agreement 2. Thai PBS agrees to provide the digital television network services for BECM as in 1. 3. BECM must not use Thai PBS’s Network Services for any purposes other than that permitted to BECM by the NBTC. Violation by BECM will result in Thai PBS reserving the right to prohibit or cease the Network Services and BECM may not use it as a ground for taking a legal action. 4. The agreement party finds acceptable the quality of television
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broadcasting through the digital television network under the standard specified by the NBTC. 5. The agreement parties must comply with rules and regulations of concerned authorities, including other agreements arising from results of frequencies coordination where the NBTC or concerned authorities have the power to supervise and control the rules and regulations. The agreement parties mutually agree not to transmit television signal that contradicts or violates the said rules or regulations. 6. Thai PBS provides to BECM only the multiplexing television network services to ensure the television broadcast is in the agreed areas. Thai PBS is responsible for and certifies that the television broadcasting conforms to the NBTC’s regulations. If any damage is incurred from the broadcasting, Thai PBS shall be liable for any such damage under the provisions of this agreement. 7. BECM has the duty to transmit the audio and video signals to Thai PBS and shall be responsible for and certify the accuracy of data, pictures and sound of television signal of BECM that is broadcast in various parts of the country in order to prevent the broadcast television signal of BECM from affecting or violating rights of any third party or violating the rules, regulations or laws applicable in the country, the damage from which shall be under sole responsibility of BECM. 8. Thai PBS shall guarantee the quality of its network services for 99.98% of broadcast time per year per main station. If any disruption, including the time during which broadcast cannot be made, does not exceed 1 hour and 45 minutes per year or not exceed 0.02% of full-time broadcasting, it shall not be deemed an event leading to a discount of service fees payable by BECM to Thai PBS under the Agreement. Such quality guarantee shall be made for the individual main stations. If the time during which broadcast cannot be made exceeds the guaranteed service quality, the request for service fee discount shall be made for the individual main stations. The discount shall be calculated based on the percentage of disruption time compared with the monthly service fee of each main station. Service fees : 1. BECM agrees to pay service fees throughout the specified period on a yearly basis, exclusive of value added tax, to Thai PBS at a rate of Baht 4.60 million per month for the standard definition channel and the kids and family channel and at Baht 13.80 million per month for the high definition channel. After Thai PBS has completely installed the network stations in the agreed areas, Thai PBS shall send an invoice, specifying therein the service fee due plus value added tax, to BECM. The first installment shall be payable within 15 days from the date Thai PBS is ready to provide services at each station until December 31 of that year and BECM shall pay the service fees in the following years by the 15th of January of each year. The two parties shall further agree on the details of each station. Thai PBS has the right to revise the said fees every three years based on the inflation rate of the foregoing year and as announced by the Bank of Thailand or reliable financial institution. 2. In the event that Thai PBS has not yet fully completed the network station installation in the agreed areas, it shall collect the service fees at the rate specified for each already installed station only. 3. BECM shall provide a letter of guarantee from a financial institution in the amount of Baht 124.03 million, or 5% of agreed value throughout the
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agreement period, to Thai PBS against its performance of obligations under the agreement. Thai PBS shall return such letter of guarantee to BECM within 30 days after BECM has been discharged from the obligations under this agreement and Thai PBS has been so notified by BECM. 4. In the event that BECM defaults on service fee payment, it shall pay a penalty fee at 2% of monthly service fee payable. Cancellation : If any party fails to perform any obligations specified in this agreement, the or termination other party shall have the right to terminate the agreement and shall so of agreement notify the defaulting party in writing at least three months before the proposed date of agreement termination. If BECM breaches the agreement, it agrees to such guarantee deposit being confiscated by Thai PBS or the payment being demanded from the letter of guarantee issuing bank. BECM must pay for the outstanding balance of such fees plus VAT to Thai PBS until expiry of the agreement. Assignment of : During the term of the agreement, the parties hereto agree not to assign the rights to other rights or duties under this agreement to any third party without prior written party consent from the other party hereto. In case such consent is given, the assigning party shall so notify the assignee and the assignee shall perform all duties and obligations borne by the assigning party to the other party hereto in all respects.
2. Company profile
2.1 Background
BEC World Plc. (“the Company” or “BEC”) was founded on November 13, 1990 with an initial registered capital of Baht 5 million. BEC shares commenced trading on the SET on July 18, 1996. As of December 31, 2013, its registered and paid-up capital stood at Baht 2,000 million, divided into 2,000 million ordinary shares with a par value of Baht 1 per share.
As of December 31, 2013, BEC World Group of Companies was composed of BEC World Plc., which is the parent company, and 24 subsidiaries and two associated companies. The group can be categorized by line of business as follows:
1. Broadcasting and media businesses
1.1 TV broadcasting divided into:
o Free-to-air TV broadcasting: The Bangkok Entertainment Co., Ltd. (“Bangkok Entertainment”) has operated Thai TV Channel 3 in the analog terrestrial broadcasting system covering all parts of the country under the concession agreement with MCOT Plc. In 2013, broadcasting will be launched on three new channels in the digital terrestrial television platform, to be operated by BEC- Multimedia Co., Ltd. (“BECM”).
o Subscribed TV broadcasting: BEC World Group is interested in the subscribed TV broadcasting business and looks for opportunity to expand its transmission to various countries throughout the world. The group undertook a trial broadcasting of its TV programs to Japan and the US. Currently, it is looking for business alliances in various countries.
1.2 Radio broadcasting There are two radio stations: FM frequency 105.5 MHz operated by Bangkok Entertainment and FM frequency 95.5 MHz operated by You
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& I Corporation Co., Ltd. BEC-TERO Radio Co., Ltd. (formerly Virgin BEC- TERO Radio (Thailand) Co., Ltd.) is responsible for sale of airtime and giving of advice on program development. Furthermore, with their skills in radio broadcasting, BEC-Tero Entertainment Plc. and BEC-Tero Radio Co., Ltd. have jointly produced radio programs for FM frequency 98.0 MHz since the beginning of 2014.
1.3 New media New media, i.e. the Internet and mobile phone related businesses, are operated by BECi Corporation Ltd. The group is also looking for opportunity to operate satellite TV through Bangkok Satellite & Telecommunication Co., Ltd. and Satellite TV Broadcasting Co., Ltd. Moreover, BEC-Tero App Co., Ltd. conducts business regarding sale of online books, electronic books and other business in relation to information technology.
2. Program sourcing/production, distribution and extended and supporting businesses
2.1 Program sourcing, production and distribution are operated through BEC World Plc., Rungsirojvanit Co., Ltd., New World Production Co., Ltd., Bangkok Television Co., Ltd., TVB 3 Network Co., Ltd., BEC International Distribution Co., Ltd. and BEC-Tero Entertainment Plc. In addition, program sourcing and production to be broadcast in the Republic of the Union of Myanmar is operated through Forever BEC-Tero Co., Ltd.
2.2 Production of shows, music and campaign activities is operated by BEC-Tero Entertainment Plc. Besides, BEC-Tero Scenario Co., Ltd. conducts business relating to musical play; BEC-Tero TrueVisions Co., Ltd. engages in event organizing and sports activities management; BEC-Tero Sasana Co., Ltd. manages a football club; and IMG BEC-Tero Sports & Entertainment Co., Ltd. organizes sport competition, contest and show, whereby Thai Ticket Major Co., Ltd. provides public relations activities and advertising services, as well as ticket sales (shows and bus tickets). Furthermore, BEC-Tero Myanmar Co., Ltd. provides services with respect to reservation and sale of tickets, entertainment events and distribution services for audio/video CD production in the Republic of the Union of Myanmar.
2.3 Extended and supporting businesses consist of information technology services provided by BEC IT Solution Co., Ltd., asset management and leases provided by BEC Asset Co., Ltd., and broadcasting facilities services provided by BEC Broadcasting Center Co., Ltd. In addition, there is a plan to provide a wide range of production services, including studio and/or equipment rental and post-production services by BEC Studio Co., Ltd. With respect to news production, BEC News Bureau Co., Ltd. produces and provides news for broadcasting on radio and television, as well as for sales to other news stations.
. Revenue structure of BEC and its subsidiaries for 2011-2013 is as follows:
Product/Service Operated by 2011 2012 2013 Baht % Baht % Baht % million million million Advertising income From television BEC World Plc. Bangkok Entertainment1 Rungsirojvanit1 Bangkok Television1 BEC-Tero and subsidiaries2 Total advertising income from television 11,566.91 89.18 13,112.85 86.81 14,451.62 86.87
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Product/Service Operated by 2011 2012 2013 Baht % Baht % Baht % million million million From radio station Bangkok Entertainment1 You & I1 BEC-Tero and subsidiaries2 Total advertising income from radio station 400.25 3.09 500.65 3.31 493.47 2.97 Total advertising income 11,967.16 92.27 13,613.50 90.12 14,945.09 89.83 Income from copyright and other Bangkok services Entertainment1 0.25 0.00 0.31 0.00 0.42 0.00 Bangkok Television1 28.69 0.22 119.60 0.79 76.84 0.46 BEC-Tero and subsidiaries2 211.57 1.63 291.46 1.93 404.39 2.43 BEC International Distribution1 2.66 0.02 2.47 0.02 2.37 0.02 BEC IT Solution1 0.18 0.00 0.42 0.00 0.32 0.00 BECi and subsidiaries1 26.53 0.20 36.87 0.24 35.61 0.21 Income from copyright and other services 269.88 2.07 451.13 2.98 519.95 3.13 Income from concerts and shows BEC-Tero and subsidiaries2 566.56 4.37 800.97 5.30 873.85 5.25 Sales of goods BEC IT Solution1 BEC-Tero and subsidiaries2 - - 20.37 0.13 89.76 0.54 Total income from sales and services 12,803.60 98.71 14,885.97 98.55 16,428.65 98.75 Other income 166.74 1.29 219.01 1.45 208.19 1.25 Total revenues 12,970.34 100.00 15,104.98 100.00 16,636.83 100.00 Note 1 99.99% held by BEC World Plc. 2 59.99% held by BEC World Plc.
. Board of Directors and shareholders
. BEC Board of Directors, according to the affidavit dated January 22, 2014, is composed of 14 members as follows:
Name Position 1. Mr. Vichai Maleenont Chairman 2. Mr. Prasan Maleenont1/ Vice Chairman 3. Mr. Pravit Maleenont Director 4. Ms. Ratana Maleenont1/ Director 5. Ms. Nipa Maleenont1/ Director 6. Ms. Amphorn Maleenont1/ Director 7. Mr. Prachum Maleenont1/ Director 8. Mrs. Ratchanee Nipatakusol1/ Director 9. Mr. Arun Ngamdee Independent Director and Chairman of the Audit Committee 10. Mr. Prathan Rangsimaporn Independent Director and Member of the Audit Committee 11. Mr. Manit Boonprakob Independent Director and Member of the Audit Committee 12. Mr. Matthew Kichodhan Director 13. Mr. Chansak Fuangfu Independent Director 14. Mr. Somchai Boonnamsiri Independent Director Note: 1/ These six directors also serve on BECM’s seven-member board of directors.
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Authorized signatories: Mr. Vichai Maleenont, Board Chairman, authorized to sign with the Company’s seal affixed or any two of seven directors, namely Mr. Prasan Maleenont, Mr. Pravit Maleenont, Ms. Ratana Maleenont, Mr. Prachum Maleenont, Ms. Amphorn Maleenont, Ms. Nipa Maleenont and Mrs. Ratchanee Nipatakusol, authorized to co-sign with the Company’s seal affixed.
. Shareholders
As of August 23, 2013 (the latest closing date of shareholder register book to determine rights to dividend), the Company had a total registered and paid-up capital of Baht 2,000,000,000, divided into 2,000,000,000 ordinary shares with a par value of Baht 1 per share. Details of its shareholders are as follows:
% of total Name No. of shares shares 1. Maleenont Group* 940,600,000 47.03 2. Chase Nominees Limited 42 188,837,870 9.44 3. Thai NVDR Co., Ltd. 116,811,977 5.84 The Hongkong Shanghai Banking Corporation 75,190,925 3.76 4. Limited, Fund Service Department 5. HSBC (Singapore) Nominees Pte. Ltd. 67,774,672 3.39 6. BNP Paribas Securities Services Luxembourg 43,050,048 2.15 7. State Street Bank Europe Limited 37,540,082 1.88 8. State Street Bank and Trust Company 33,012,522 1.65 9. GIC Private Limited - C 19,971,500 1.00 10. The Bank of New York (Nominees) Limited 19,780,916 0.99 Total of top 10 shareholders 1,542,570,512 77.13 11. Other shareholders 457,429,488 22.87 Total 2,000,000,000 100.00
Note * Details of shareholding by the Maleenont Group are as follows:
Name No. of shares % of total (shares) shares 1. Mr. Pravit Maleenont 117,575,000 5.88 2. Mr. Prachum Maleenont 117,575,000 5.88 3. Ms. Nipa Maleenont 117,575,000 5.88 4. Ms. Amphorn Maleenont 115,175,000 5.76 5. Ms. Ratana Maleenont 113,575,000 5.68 6. Mr. Prasan Maleenont 111,667,500 5.58 7. Mrs. Ratchanee Nipatakusol 100,317,500 5.02 8. Ms. Tracey Ann Maleenont 78,570,000 3.93 9. Ms. Cathleen Maleenont 68,570,000 3.43 Total 940,600,000 47.03
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. Summary of operating results and financial position
. Table showing financial position and performance of BEC and its subsidiaries for 2011-2013
As of December 31 2011 2012 2013 Statements of financial position Baht Baht million % million % Baht million % Assets Current assets Cash and cash equivalents 3,147.18 31.96 3,097.71 28.75 2,522.66 20.68 Short-term investments 2,000.60 20.31 2,568.16 23.84 3,265.91 26.78 Trade and other receivables 906.66 9.21 1,192.33 11.07 1,483.93 12.17 Short-term loans to related parties - - 0.39 0.00 91.50 0.75 Inventories 4.06 0.04 1.48 0.01 4.68 0.04 Other current assets 165.07 1.68 221.15 2.05 261.53 2.14 Total current assets 6,223.57 63.19 7,081.21 65.73 7,630.20 62.56 Non-current assets Available-for-sale securities 55.34 0.56 106.60 0.99 206.79 1.70 Investments in associates - - 23.41 0.22 86.99 0.71 Bank deposits with obligation 82.92 0.84 84.19 0.78 86.47 0.71 Other long-term investments 3.00 0.03 3.00 0.03 3.00 0.02 Investment property 63.25 0.64 63.25 0.59 65.15 0.53 Property, plant and equipment 258.24 2.62 268.78 2.49 316.82 2.60 Intangible assets 55.26 0.56 65.84 0.61 70.73 0.58 Deferred right to use property 1,053.10 10.69 1,039.41 9.65 1,148.36 9.42 Deferred additional compensation 385.39 3.91 338.48 3.14 291.70 2.39 Auction deposit for Digital TV License - - - - 203.00 1.66 Deferred pictures rental, picture products, plays and copyright charges 1,264.07 12.84 1,243.71 11.54 1,387.28 11.37 Deposit on pictures copyright 3.40 0.03 3.20 0.03 4.08 0.03 Prepaid plays production 207.94 2.11 269.14 2.50 493.68 4.05 Deferred tax assets 117.45 1.19 126.10 1.17 114.48 0.94 Other non-current assets 75.59 0.77 57.62 0.53 87.32 0.72 Total non-current assets 3,624.95 36.81 3,692.71 34.27 4,565.86 37.44 Total assets 9,848.53 100.00 10,773.92 100.00 12,196.07 100.00 Liabilities and shareholders’ equity Current liabilities Short-term loans from financial institutions - - - - 210.00 1.72 Trade and other payables 398.28 3.82 515.32 4.78 860.97 7.06 Accrued expenses 421.94 4.28 507.79 4.71 562.84 4.61 Current portion of financial leases - - 0.75 0.01 1.03 0.01 Short-term borrowings from related party 7.84 0.08 - - - - Corporate income tax payable 596.78 6.06 569.58 5.29 472.63 3.88 Other current liabilities 620.73 6.30 468.51 4.35 499.04 4.09 Total current liabilities 2,045.57 20.77 2,061.95 19.14 2,606.51 21.37 Non-current liabilities
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As of December 31 2011 2012 2013 Statements of financial position Baht Baht million % million % Baht million % Financial leases 0.00 0.00 2.65 0.02 2.90 0.02 Provision for long-term employee benefits 373.11 3.79 401.57 3.73 471.17 3.86 Other non-current liabilities 0.00 0.00 0.46 0.00 0.59 0.00 Total non-current liabilities 373.11 3.79 404.67 3.76 474.65 3.89 Total liabilities 2,418.68 24.56 2,466.62 22.89 3,081.17 25.26
Shareholders’ equity Authorized share capital 2,000.00 2,000.00 2,000.00 Issued and paid-up share capital 2,000.00 20.31 2,000.00 18.56 2,000.00 16.40 Premium on common stocks 1,166.72 11.85 1,166.73 10.83 1,166.72 9.57 Retained earnings Appropriated Legal reserve 200.00 2.03 200.00 1.86 200.00 1.64 Unappropriated 3,925.20 39.86 4,702.45 43.65 5,364.47 43.99 Other components of shareholders’ equity (27.59) (0.28) 13.29 0.12 95.86 0.79 Total shareholders’ equity of parent company 7,264.34 73.76 8,082.47 75.02 8,827.06 72.38 Non-controlling interests 165.51 1.68 224.83 2.09 287.85 2.36 Total shareholders’ equity 7,429.84 75.44 8,307.30 77.11 9,114.90 74.74 Total liabilities and shareholders’ equity 9,848.53 100.00 10,773.92 100.00 12,196.07 100.00
For the year ended December 31 2011 2012 2013 Statements of income Baht Baht Baht million % million % million % Revenues Advertising income 11,967.16 92.27 13,613.50 90.13 14,945.09 89.83 Income from copyright and other services 267.87 2.07 451.13 2.99 519.95 3.13 Income from organizing concerts and shows 566.56 4.37 800.97 5.30 873.85 5.25 Sales of goods 2.01 0.02 20.37 0.13 89.76 0.54 Other income 166.74 1.29 219.00 1.45 208.19 1.25 Total revenues 12,970.34 100.00 15,104.98 100.00 16,636.83 100.00 Expenses Cost of sales and services 5,601.92 43.19 6,195.88 41.02 6,710.88 40.34 Cost of organizing concerts and shows 466.05 3.59 685.01 4.54 833.79 5.01 Selling expenses 434.75 3.35 514.58 3.41 607.40 3.65 Administrative expenses 1,195.81 9.22 1,277.38 8.46 1,319.22 7.93 Directors’ remuneration 19.00 0.15 18.97 0.13 20.22 0.12 Finance costs 0.64 0.00 0.44 0.00 2.36 0.01 Total expenses 7,718.17 59.51 8,692.25 57.55 9,493.88 57.07 Share of profit of associates held by subsidiary - - 22.83 0.15 60.16 0.36 Profit before income tax expenses 5,252.16 40.49 6,435.56 42.61 7,203.11 43.30 Income tax expenses 1,622.56 12.51 1,498.42 9.92 1,448.90 8.71
- 20- Opinion of the Independent Financial Advisor on acquisition of assets
For the year ended December 31 2011 2012 2013 Statements of income Baht Baht Baht million % million % million % Profit for the year 3,629.60 27.98 4,937.14 32.69 5,754.21 34.59 Profit attributable to 5,589.4 Equity holders of the parent 3,530.35 4,777.25 8 Non-controlling interests 99.26 159.89 164.73
Cash flow
(Unit: Baht million) 2011 2012 2013 Net cash provided from (used in) operating activities 5,685.88 6,580.70 7,269.91 Net cash provided from (used in) investing activities (3,990.91) (2,508.94) (3,054.24) Net cash provided from (used in) financing activities (3,737.08) (4,107.45) (4,790.71) Net (decrease) increase in cash and cash equivalents (2,042.12) (35.69) (575.04) Cash and cash equivalents at beginning of year 5,189.30 3,147.18 3,097.71 Cash and cash equivalents transferred out from disposal of subsidiary held by subsidiary - (12.61) - Cash and cash equivalents transferred out from dissolved subsidiary held by subsidiary - (1.17) - Cash and cash equivalents at end of year 3,147.18 3,097.71 2,522.66 Note: Financial statements for 2011-2013 were audited by Dr. Virach Aphimeteetamrong, CPA Registration No. 1378, of Dr. Virach and Associates Co., Ltd., an SEC-approved auditor.
Key financial ratios 2011 2012 2013 Liquidity ratio Current ratio (time) 3.04 3.43 2.93 Quick ratio (time) 2.96 3.33 2.79 Account receivable turnover ratio (time) 14.14 14.77 12.72 Average collection period (day) 25 24 28 Account payable turnover ratio (time) 17.55 16.65 12.24 Repayment period (day) 21 22 29 Cash cycle (day) 4 2 (1) Profitability ratio Gross profit margin (%) 53% 54% 55% Net profit margin (%) 27% 32% 34% Return on equity (%) 46% 61% 64% Efficiency ratio Return on assets (%) 36% 46% 49% Return on fixed assets (%) 1,279% 1,847% 1,942% Asset turnover (time) 1.33 1.46 1.45 Financial policy ratio Debt to equity ratio (time) 0.33 0.30 0.34
- 21- Opinion of the Independent Financial Advisor on acquisition of assets
2011 2012 2013 Coverage ratio (time) 0.82 0.84 0.84 Payout ratio (%) 102% 94% 93% Per share information Earnings per share (Baht) 1.77 2.39 2.79 Book value per share (Baht) 3.71 4.15 4.56
. Analysis of operating results and financial position
Operating results in 2011-2013
The Company and its subsidiaries (BEC World Group) recorded total revenues of Baht 12,970 million, Baht 15,105 million and Baht 16,637 million in 2011-2013 respectively, growing by Baht 2,135 million or 16.46% in 2012 and by Baht 1,532 million or 10.14% in 2013. Approximately 90% - 92% of total revenues came from advertising income, which in 2011-2013 amounted to Baht 11,967 million, Baht 13,614 million and Baht 14,945 million respectively, up by Baht 1,647 million or 13.76% in 2012 and by Baht 1,331 million or 9.78% in 2013. Income from organizing concerts and shows was Baht 567 million in 2011, increasing by Baht 234 million or 41.27% to Baht 801 million in 2012 and by Baht 73 million or 9.11% to Baht 874 million in 2013. Income from copyright and other services totaled Baht 268 million, Baht 451 million and Baht 520 million in 2011-2013 respectively, growing by Baht 183 million or 68.28% in 2012 and by Baht 69 million or 15.30% in 2013.
During 2012-2013, BEC World Group could continuously grow their advertising income. In 2012, such growth resulted from the low income base in the final quarter of 2011 when there were severe impacts from the flood crisis. In 2012 and 2013, the group benefited from stronger purchasing power from the overall economic condition, which led to new product launches and keener competition among product owners/advertisers. BEC World Group accordingly fine-tuned their business strategies to fit with such market environment by, for instance, rescheduling broadcasting programs, revising prices up for certain airtimes, extending airtime for programs with high selling price, etc. Other businesses of the group could increase their revenues as well thanks to restored confidence in overall economic improvement coupled with BEC World Group’s strong market presence.
The group’s total expenses are primarily composed of cost of sales and services and cost of organizing concerts and shows. In 2011-2013, cost of sales and services amounted to Baht 5,602 million, Baht 6,196 million and Baht 6,711 million respectively, making up 46.81%, 45.51% and 44.90% of total sales revenues respectively and increasing by Baht 594 million or 10.60% in 2012 and by Baht 515 million or 8.31% in 2013. The increase in cost of sales and services in 2012-2013 was in line with growth in sales revenues and partly resulted from business expansion, program rescheduling for newly-launched programs, and extension of airtime for programs with high selling price which, at the same time, allowed the group to grow their revenues and profits. In particular, the increase in such cost in 2012 was ascribed to the live broadcast of some special programs such as the Euro 2012 Football Championship, the Olympic Games, and the English Premier League football matches, while these programs did not take place in 2013. In 2011-2013, cost of organizing concerts and shows was Baht 466 million, Baht 685 million and Baht 834 million respectively, a surge of Baht 219 million or 46.99% in 2012 and Baht 149 million or 21.75% in 2013. The group posted a gross profit margin of 53.19% in 2011, 54.49% in 2012 and 55.10% in 2013.
Selling and administrative expenses (including directors’ remuneration) were Baht 1,650 million, Baht 1,811 million and Baht 1,947 million in 2011-2013 respectively, increasing by Baht 161 million or 9.76% in 2012 and by Baht 136 million or 7.51% in 2013. Selling expenses went up from Baht 435 million in 2011 by Baht 80 million or 18.39% to Baht 515 million in 2012 and by Baht 92
- 22- Opinion of the Independent Financial Advisor on acquisition of assets million or 17.86% to Baht 607 million in 2013. The consistent increase in selling expenses was in line with revenue growth and also resulted from more diverse marketing activities, partly aimed at increasing recognition among business partners and the audience which would relatively strengthen popularity and sales growth.
The group’s administrative expenses (including directors’ remuneration) amounted to Baht 1,215 million, Baht 1,296 million and Baht 1,339 million in 2011-2013 respectively, rising by Baht 81 million or 6.67% in 2012 and Baht 43 million or 3.32% in 2013. The minimal increase rate of administrative expenses in each year resulted from the group’s effective cost control. The group was able to control costs and expenses to grow at a slower pace than revenues. Most of the group’s businesses had more fixed costs than variable costs.
BEC World Group posted a net profit (attributable to equity holders of the parent) of Baht 3,530 million in 2011, soaring by Baht 1,247 million or 35.33% to Baht 4,777 million in 2012 and by Baht 812 million or 17.00% to Baht 5,589 million in 2013. Such profit growth was in tandem with the factors that led to changes in revenues, costs and expenses as described above. Net profit margin stood at 27.22% in 2011, 31.63% in 2012 and 33.60% in 2013.
Financial position as at the end of 2011-2013
BEC World Group had total assets of Baht 9,849 million, Baht 10,774 million and Baht 12,196 million in 2011-2013 respectively, growing by Baht 925 million or 9.39% in 2012 and by Baht 1,422 million or 13.20% in 2013. Most of the assets, around 63% - 66%, were current assets comprising cash and cash equivalents of Baht 3,147 million, Baht 3,098 million and Baht 2,523 million or 31.95%, 28.75% and 20.69% of total assets respectively and short-term investments of Baht 2,001 million, Baht 2,568 million and Baht 3,266 million or 20.32%, 23.84% and 26.78% of total assets respectively. The asset growth as at the end of 2012 was mainly contributed by an increase in short-term investments of Baht 567 million or 28.34%, trade and other receivables of Baht 285 million or 31.42%, and prepaid plays production of Baht 61 million or 29.33%.
Growth in total assets as of year-end 2013 was mainly attributed to an increase in short- term investments of Baht 698 million or 27.18%, prepaid plays production of Baht 225 million and deferred pictures rental, picture products, plays and copyright charges of Baht 144 million due to consistent investments made in preparation for entry into the digital TV broadcasting. Moreover, the group had to make an auction deposit for the Digital TV License amounting to Baht 203 million subsequent to the participation in and wining of the bid for three licenses at the total bid price of Baht 6,471 million.
Total liabilities were Baht 2,419 million, Baht 2,467 million and Baht 3,081 million in 2011-2013 respectively, up by Baht 48 million or 1.98% in 2012 and Baht 614 million or 24.89% in 2013. More than 84% - 85% of total liabilities were current liabilities, consisting of trade and other payables, accrued expenses, corporate income tax payable, and other current liabilities. The increase in total liabilities as at the end of 2012 stemmed largely from an increase in trade and other payables of Baht 117 million and accrued expenses of Baht 86 million in line with the usual rise in investments and transactions. Provision for long-term employee benefits went up by Baht 28 million while other current liabilities dropped by Baht 152 million.
The increase in total liabilities as of year-end 2013 resulted mainly from an increase in trade and other payables of Baht 346 million and short-term loans from financial institutions of Baht 210 million due to the accrued amount in line with the usual increase in investments and transactions. Meanwhile, corporate income tax payable decreased by Baht 97 million.
Shareholders’ equity of BEC World Group amounted to Baht 7,430 million, Baht 8,307 million and Baht 9,115 million in 2011-2013 respectively, growing by Baht 877 million or 11.80% in 2012 and Baht 808 million or 9.73% in 2013. The equity growth as at the end of 2012 was ascribed to
- 23- Opinion of the Independent Financial Advisor on acquisition of assets net profit (attributable to equity holders of the parent) of Baht 4,777 million and gains on available- for-sale securities of Baht 41 million, offset by dividend payment of Baht 4,000 million. Likewise, the increase in shareholders’ equity as at year-end 2013 was contributed by net profit (attributable to equity holders of the parent) of Baht 5,589 million and gains on available-for-sale securities of Baht 80 million, offset by dividend payment of Baht 4,900 million.
2.2 Industry situation relating to television broadcasting business
Television broadcasting business in Thailand is divided into (1) free-to-air TV broadcasting and (2) subscribed TV broadcasting. Free-to-air TV broadcasting has been concentrated in six main networks using the analog signal technology, where the five original networks (comprising Channel 3 operated by Bangkok Entertainment, a BEC subsidiary, Channels 5, 7, 9 and 11) broadcast in VHF system and the new network, “Thai PBS” (originally operated under the name “ITV,” then changed to “T-ITV” and finally changed to a public service TV), broadcasts in UHF system. Even though all networks have about the same nationwide broadcasting coverage, only two major networks (Channel 3 and Channel 7), due to their longstanding popularity, have dominated the broadcasting industry with the aggregate percentage of viewers as high as 70%.
Competition in the free TV business, in fact, is not limited to only the six networks, Channels 3, 5, 7, 9, 11 and Thai PBS, which are accessible via antennas. Apart from these six original TV stations, there are currently hundreds of free TV channels that are broadcast in Thai language, but accessible only through satellite dish. As such, viewers have to invest in installation of a satellite dish in order to access these additional channels. Due to the problematic frequency reception via fishbone antenna and the difference arising from factors such as location, environment and distance between households and transmission posts, satellite television which is cheaper to install and maintain has therefore been gaining greater popularity over the past several years. It is anticipated that more than 70% of total households nationwide have access to television broadcast through satellite dish. As a consequence, competition in domestic television industry is no longer limited to only the six original broadcasters.
Television business is instrumental in the country’s economic and social systems and also in the people’s way of thinking and behavior since television is the most accessible and influential media to consumers. Today, consumers can access television media via three platforms: free-to-air analog terrestrial television (“free TV”) with six channels and covering approximately 40% of total households equipped with television sets; and cable television and satellite television with more than 200 channels and covering around 60% of total households equipped with television sets, which therefore could reach a greater number of audiences than the analog terrestrial television.6 In view of advertising income, it is apparent that advertising income from free TV is ranking top, reaching about Baht 70,000 million in 2013 or 60% of total advertising value through all media. Producers of goods and services still prefer to advertise their products and services via free TV, leading the advertising fees charged by free TV to be as much as 20-30 times7 higher than those charged by cable TV or satellite TV.
6 Based on the Information Memorandum on Approval of Licenses to Use Allocated Frequencies for National Commercial Digital Television Services B.E. 2556 of the Office of the National Broadcasting and Telecommunications Commission. 7 Based on an article on the Future of Thai TV Alternatives in the Digital TV Era, SCB Economic Intelligence Center (EIC), by Mr. Jaturon Ampai, November 21, 2013.
- 24- Opinion of the Independent Financial Advisor on acquisition of assets
Table illustrating advertising value via all types of media in 2008-2013 and its growth rate in 2010-2013
Value (Baht million) Growth rate (%) (Unit: Baht million) 2009 2010 2011 2012 2013 09/10 10/11 11/12 12/13 Television 52,935 60,766 62,238 68,105 69,249 14.79% 2.42% 9.43% 1.68% Radio 6,168 6,116 5,918 6,358 6,321 (0.84%) (3.24%) 7.43% (0.58%) Newspaper 14,149 15,000 14,541 15,183 15,258 6.01% (3.06%) 4.42% 0.49% Magazine 5,426 5,694 5,824 5,595 5,518 4.94% 2.28% (3.93%) (1.38%) Movie theater 4,856 5,987 7,224 7,906 7,519 23.29% 20.66% 9.44% (4.90%) Signboard 3,965 3,849 4,278 4,532 4,153 (2.93%) 11.15% 5.94% (8.36%) Media in mass transit system 1,764 2,188 2,643 2,960 3,512 24.04% 20.80% 11.99% 18.65% Media in retail shops 819 1,121 1,618 2,733 2,623 36.87% 44.34% 68.91% (4.02%) Internet 259 290 470 573 877 11.97% 62.07% 21.91% 53.05% Total 90,341 101,011 104,754 113,945 115,029 11.81% 3.71% 8.77% 0.95% Source: Report by the Nielsen Company (Thailand) Ltd. available on website of the Advertising Association of Thailand (www.adassothai.com)
According to a report of Kasikorn Research Center (Krasaethat No. 2443 dated December 24, 2013), the migration from analog to digital television technology is an evolution into a better visual and audio quality broadcasting that can accommodate a broader variety of services, including two- way interactive service, video-on-demand, and so on. Moreover, the efficiency in frequency utilization will be improved since as many as 8 - 25 TV channels can be broadcast on one single frequency, compared with one channel for one frequency in the analog system. This will allow for the digital TV to provide as high as 48 channels, categorized into 12 public service channels, 12 community service channels and 24 commercial service channels. The 24 commercial service channels are divided into four sub-categories: seven variety program channels with HD transmission, seven variety program channels with SD transmission, seven news and information channels, and three kids and family program channels.
The National Broadcasting and Telecommunications Commission (NBTC) has selected the Digital Video Broadcasting Terrestrial Second Generation or DVB-T2, a European digital television technology, as the digital terrestrial television broadcasting standard for Thailand. Private operators are encouraged to participate in bidding for licenses to operate the 24 commercial service channels, thereby ensuring diversity of operators to compete in the local television media business on an equitable basis under oversight of the NBTC. The winning bidders are obligated to commence the broadcasting within 30 days after obtaining the license.
The television broadcasting business is anticipated to witness a more distinctive change in 2014, subsequent to the digital television license auction organized in late 2013. This move marks Thailand’s entrance into a new era of television industry, which has long been monopolized by only six broadcasters. The existing six free-to-air TV channels will then be added by at least 24 new channels in the commercial service category.
The emergence of digital TV will give rise to tougher competition in the television broadcasting business, with the entry of a greater number of new free TV program owners and producers who might come from either the existing operators of satellite or cable TV programs or the content providers or the publishing business operators and the like. As well, there will necessarily be a growing number of content providers for TV programs to adequately serve the operators’ broadcasting targets. Nonetheless, Kasikorn Research Center predicts that in the first 1 - 4 years of their operation, the digital TV broadcasters, especially the new entrants, will likely face the challenge of financial management. This is because a huge capital will be required in the initial period of business operation, involving, for example, investments in program production and procurement,
- 25- Opinion of the Independent Financial Advisor on acquisition of assets bidding for a license, payment for annual license fee and annual fees for renting of both the digital terrestrial TV network and the satellite TV network, etc. Meanwhile, revenue from sale of advertising, the major income source, may not yet be received on a full scale, when compared with such high expenses, due to the fact that product owners or advertising agencies are still not confident in the popularity or rating of any such TV programs which are still in their infancy. Besides, at the early stage of the switch-over to the digital TV, the service network may not yet be completely developed to fully cover service areas nationwide, thus likely resulting in concentration of a large group of viewers in the original free TV channels.
However, despite the greater number of players in the television broadcasting business, the advertising income will grow in line with the overall economic situation. Media Agency Association of Thailand (MAAT) predicts that the 2014 advertising income will increase by roughly 5%, which is close to Thai GDP growth forecast of 4% by the Bank of Thailand.
3. Reasonableness and benefits of the transaction to the listed company
3.1 Reasonableness of the transaction
The government sector has a policy for Thai television broadcasting industry to migrate from the analog terrestrial TV to the digital terrestrial TV broadcasting, in a bid to avoid risk associated with the phase-out of analog television equipment production by 2015 as stipulated by the International Telecommunications Union (ITU). The NBTC has subsequently set for Thailand to transform to the digital terrestrial TV broadcasting under the most recently introduced Digital Video Broadcasting - Second Generation Terrestrial (DVB-T2) standard. This marks a most radical evolution in the history of Thai television industry. Such new technology offers the best development of an efficient use of radio frequencies, providing a vast number of new television channels with better signal quality and less interference, and can support new multimedia services. The public will then be able to access a broader variety of news, information and services through a greater number of television channels. In this respect, the NBTC encourages the public’s access to the digital TV by providing a discount coupon for all households to purchase a digital television set and a set-top box for conversion into digital signal. This aims to help save costs for the public and induce them to access and watch digital TV programs on a greater number of channels with better viewing quality.
The NBTC will provide a total of 48 digital terrestrial television channels in three categories: 12 public service channels, 12 community service channels and 24 commercial service channels. Initially, it gives importance to the commercial service channels and will select operators of these channels by an auction process in accordance with the Act on Organization to Assign Radio Frequency and to Regulate the Broadcasting and Telecommunications Services B.E. 2553. The 24 commercial service Digital TV License, valid for 15 years, will be granted in four categories, comprising seven high definition (HD) variety channels, seven standard definition (SD) variety channels, seven news and information channels, and three kids and family channels. The NBTC sets out that each group of “broadcasters” can operate not more than three categories (out of the total four categories) and those who have applied for the HD channel license may not apply for the news and information channel license, meaning that they must choose only one of these two licenses.
As for the six original terrestrial free TV channels, i.e. Channels 3, 5, 7, 9, 11 and Thai PBS, the NBTC allows for the state-owned channels to continue broadcasting for a certain period of time and the privately-run channels to operate until the end of period specified in the concession agreement made with the government sector. In the future when the new broadcasting technology or the digital TV has become widely accepted, the original channels will be phased out or disappear and television broadcast will be conducted in the digital system only.
Channel 3 has been operated by Bangkok Entertainment, a BEC subsidiary, on the analog terrestrial television broadcasting platform covering all parts of the country (free TV) under the Build- Transfer-Operate (BTO) concession agreement with the Mass Communication Organization of
- 26- Opinion of the Independent Financial Advisor on acquisition of assets
Thailand (“MCOT”).8 Under such agreement, Bangkok Entertainment was responsible for building 32 color television signal transmission stations in the central and regional parts of the country and was awarded a license to operate Thai TV Color Channel 3. Bangkok Entertainment signed a total of four subsequent concession agreements, the latest one of which, dated May 2, 1989, is valid for 30 years and will end on March 25, 2020. Therefore, when such concession agreement expires, Channel 3 on the analog terrestrial broadcasting platform will no longer exist, which will be aligned with the NBTC’s policy to replace the conventional analog broadcasting with the digital system across the country.
Considering the above mentioned necessity and in order to enable the continuance of the terrestrial television broadcast, which is BEC World Group’s core business, after expiry of Channel 3 concession agreement, as well as to create business expansion opportunity and other benefits that will help to generate value added and return for the Company and its shareholders in the long term, BEC- Multimedia Co., Ltd. (BECM), the Company’s subsidiary, accordingly participated in the auction for the license to use allocated frequencies for operation of digital terrestrial television broadcasting. There are three essential components in order to operate this business, i.e. 1) being a grantee of the license to use allocated frequencies for national commercial terrestrial digital television broadcasting services; 2) being a rentee of the digital television network services provided by the NBTC’s licensed network service provider; and 3) investing in procurement of television equipment and studio for production and transmission of television signal to the service provider for further broadcasting in all parts of the country.
Participation in the auction for the Digital TV License
BECM won the bid for the Digital TV License in three categories at the total bid price of Baht 6,471 million (exclusive of VAT) for a term of 15 years from the date of obtaining the License, comprising one HD variety channel license with a license fee of Baht 3,530 million; one SD variety channel license of Baht 2,275 million; and one kids and family channel license of Baht 666 million. This marks an expansion into the same type of business in which BEC World Group has had expertise and experience for more than four decades together with competitive edge created by its name recognition as a leader in Thai television broadcast industry complete with quality resources for production of diverse and numerous types of television programs. It has partnered with several “advertisers,” which render consistent support, and has maintained a strong audience base bolstered by Channel 3’s high ratings, solid capital base and plentiful cash availability, as well as a stock of quality resources and TV programs that have not yet been fully utilized to meet customers’ requirements due to the constraint on operation of only one single channel, Thai TV Channel 3, and whose concession agreement will expire in the next six years.
From the above reasons, it is deemed necessary and appropriate for the Company to enter into this transaction to acquire the Digital TV License. To operate more new TV channels will provide the Company with additional sources of revenues and give its personnel an opportunity to show their talent. Moreover, the Company can optimize the use of resources and TV programs and deliver a broader range of services to truly meet its trade partners’ needs. It can also access and maintain relationship with the audience to a stronger and more sustainable extent and assure the shareholders and investors of the continuity of its core business operation after expiry of the concession agreement for Channel 3 in the future.
The Digital TV License auction is conducted through a computer-aided process with each auction session lasting 60 minutes. Bidders must submit their first bids within the first five minutes of the session, but each bidder can submit an unlimited number of bids, while the subsequent bid price must be higher than the one previously quoted. The NBTC has set the “starting bid price” or “reserve price” for each category of the License and limit the ceiling price for each bid price offer in order to
8 MCOT became a listed company in 2004 and was renamed to MCOT Public Company Limited.
- 27- Opinion of the Independent Financial Advisor on acquisition of assets prevent an “overly high price” that will lead the final auction value to be excessively high. After the end of the auction, bidders with the highest bid prices, ranked in descending order, will win the bid according to the number of licenses provided by the NBTC for each category of the License.
Table on key details of the auction
Category No. of Channel No. Resolution Starting price Ceiling bid channels (reserve price) price/round (licenses) HD Variety 7 30-36 HD Baht 1,510 million Baht 10 million SD Variety 7 23-29 SD Baht 380 million Baht 5 million News and Information 7 16-22 SD Baht 220 million Baht 2 million Kids and Family 3 13-15 SD Baht 140 million Baht 1 million
At the auction for three categories of the Digital TV License participated in by BECM, the winning bid prices were in a range of Baht 3,320 million - Baht 3,530 million for HD Variety Category, Baht 2,200 million - Baht 2,355 million for SD Variety Category and Baht 648 million - Baht 666 million for Kids and Family Category.
BECM was the first-ranked bid winner for HD Variety Category and Kids and Family Category and the fourth for SD Variety Category. The price at which BECM won the bid for each category was close to the bid prices of other winning bidders of the same category, with a price gap of 3%-7% between the first and last winners representing that the winning bid prices are insignificantly different. Meanwhile, bid prices proposed by most losing bidders were not much lower than the winning prices. The auction was processed in compliance with the NBTC’s digital TV auction rules and procedures that are aimed to ensure free, fair and anti-monopoly competition in television broadcasting industry and promote diversity of broadcasters. The auction proved to be transparent and could reflect market demand with true competition.
Bid prices of seven winning bidders for HD Variety Digital TV License, out of the total nine participating bidders, with the starting price of Baht 1,510 million are as follows:
No. 1 BEC-Multimedia Co., Ltd. (Channel 3) Bid price of Baht 3,530 million No. 2 Bangkok Media and Broadcasting Co., Ltd. Bid price of Baht 3,460 million (Prasarttong-Osoth Group) No. 3 Bangkok Broadcasting and Television Co., Ltd. Bid price of Baht 3,370 million No. 4 Triple V Broadcast Co., Ltd. (Thai Rath Group) Bid price of Baht 3,360 million No. 5 MCOT Plc. Bid price of Baht 3,340 million No. 6 Amarin Television Co., Ltd. Bid price of Baht 3,320 million No. 7 GMM HD Digital TV Co., Ltd. Bid price of Baht 3,320 million Total value of Baht 23,700 million
Bid prices of seven winning bidders for SD Variety Digital TV License, out of the total 16 participating bidders, with the starting price of Baht 380 million are as follows:
No. 1 Thai Broadcasting Co., Ltd. (Workpoint) Bid price of Baht 2,355 million No. 2 True DTT Co., Ltd. Bid price of Baht 2,315 million No. 3 GMM SD Digital TV Co., Ltd. Bid price of Baht 2,290 million No. 4 BEC-Multimedia Co., Ltd. (Channel 3) Bid price of Baht 2,275 million No. 5 RS Television Co., Ltd. Bid price of Baht 2,265 million No. 6 Mono Broadcast Co., Ltd. Bid price of Baht 2,250 million
- 28- Opinion of the Independent Financial Advisor on acquisition of assets
No. 7 Bangkok Business Broadcasting Co., Ltd. (Nation Group) Bid price of Baht 2,200 million Total value of Baht 15,950 million
Bid prices of three winning bidders for Kids and Family Digital TV License, out of the total six participating bidders, with the starting price of Baht 140 million are as follows:
No. 1 BEC-Multimedia Co., Ltd. (Channel 3) Bid price of Baht 666 million No. 2 MCOT Plc. Bid price of Baht 660 million No. 3 Thai TV Co., Ltd. (TV Pool Group) Bid price of Baht 648 million Total value of Baht 1,974 million
Entering into the Network Services Agreement
BECM entered into the Network Services Agreement with Thai Public Broadcasting Service (“Thai PBS”) to rent the network for fulltime HD television signal broadcasting on one HD variety channel and fulltime SD broadcasting on one SD variety channel and one kids and family channel, with total rental fees chargeable from April 1, 2014 to June 16, 2028 of Baht 3,795.55 million (exclusive of VAT). This is one of the preconditions to be fulfilled by the Company under the NBTC’s requirements before obtaining the License, aimed to ensure that BECM’s broadcasting will reach the audience in all parts of the country efficiently in the HD and SD formats with service quality control to the standards regulated by the NBTC. Currently, there are four operators licensed by the NBTC to provide the terrestrial digital television network services (known as multiplex or “mux”), namely the Royal Thai Army Radio and Television Station (RTA), MCOT Plc., the Public Relations Department and Thai PBS. It is required by the NBTC that all licensed mux operators install base stations to enable the digital TV broadcasting in the first year (2514) to cover 11 million households or 50% of total households nationwide, rising to 80% within two years, 90% within three years, and 95% within four years from the date of obtaining the license. The four mux operators already have their own signal transmission network in the analog system, which can be changed to the digital system without difficulty since they have the existing network system and management system readily available.
The Company has decided to use the network services from Thai PBS based on the latter’s readiness in terms of equipment and network and the fact that Thai PBS is the pioneer in HD broadcasting in Thailand.9 Moreover, Thai PBS charges a reasonable rate of service fees10 and operates business primarily for public interest. It has since 2013 conducted a test-run of the digital terrestrial broadcasting in conjunction with the RTA. It will gradually install network stations to reach the total number of 39 main stations and expects to achieve the coverage target of 97% of total households nationwide by mid-2015, which will be about two years faster than the NBTC’s schedule.
In addition, BECM will invest in space renting, renovation of premises for constructing studio and procurement of digital television equipment at the total investment cost of Baht 1,000.2 million (exclusive of VAT). In the initial period of operation, it will lease studio and television equipment
9 Thai PBS TV station, operated by Thai Public Broadcasting Service (Thai PBS), is the first terrestrial free- to-air television station in Thailand to broadcast in HD format through Thaicom 5 Satellite in C-Band, using DVB-S receiver box, and also through the Internet network via Thai PBS website, available as from May 21 2011. 10 Rental service fees for digital terrestrial television network charged by the four existing service providers are as follows: Rental fees (Baht million/month) RTA MCOT PRD Thai PBS 1. SD 4.72 4.76 4.65 4.60 2. HD 14.16 14.28 13.95 13.80
- 29- Opinion of the Independent Financial Advisor on acquisition of assets from another BEC subsidiary which provides studio and television equipment services. Such investment in new studio and equipment procurement by BECM is aimed to acquire assets of high efficiency that are compatible with the digital system and to enhance its capability in television program production and increase its broadcast signal quality, which is one of the components required to be carried out so as to ensure efficiency in digital television broadcasting service.
Digital TV broadcasting business plan
The Company will operate the digital TV business through its subsidiary, BEC-Multimedia Co., Ltd. (BECM) which was established on October 9, 2000 and currently (as at March 13, 2014) has a registered capital of Baht 200 million and a paid-up capital of Baht 50 million. BECM won the bid for the Digital TV License for three channels: Kids and Family Category on Channel 13, SD Variety Category on Channel 28, and HD Variety Category on Channel 33.
The Company plans for the three new digital TV channels to have their own uniqueness and not to compete with Channel 3. The said newly introduced channels will individually possess a definite identity and more specifically serve a niche market when compared with Channel 3. It is neither necessary nor beneficial for the new channels to have a broad coverage, which will otherwise lead them to operate in competition with Channel 3. Channel 3 will continue to emphasize premium quality programs with high ratings and an extensive viewership base and serve as a mass marketing media.
For the HD and SD variety digital TV channels, the Company has a large stock of quality programs that have never been broadcast and has maintained longstanding relationship with some producers who are prepared to create a wide variety of TV programs to satisfy diverse needs of different target groups. These programs can be developed and filled in the broadcasting schedule for the HD and SD channels which will be of less premium quality and lower ratings. The Company will penetrate and focus on the niche market as deemed suitable for the target groups in each broadcasting period. By doing so, it will be able to build up an audience base better and quicker when compared with the mass market. The programs will be developed for the niche market media, which fits well with the market environment where a vast number of new TV channels in the same system (digital) will emerge simultaneously and viewership base will be shared to these new channels. Besides, advertisers for niche markets will benefit from cost-saving and efficient advertisement spending since they will not have to unnecessarily use a large amount of funds for mass marketing campaigns. This is a positive factor helping to encourage new entrants to increasingly use television media for advertising their products, hence triggering competition in this market and resulting in stronger growth in advertising revenues.
Furthermore, it is initially possible that some current programs of Channel 3 that are produced in the HD digital system will be broadcast in parallel on the HD variety digital TV channel, thereby helping to partially cut down cost of program production. At the same time, viewers will be able to watch such programs on either channel, in the familiar conventional format (analog system on Channel 3) or in the new technology (digital system on Channel 33), which could also help promote the digital TV channel. The Company has a policy to manage the two channels (HD and SD) in a mutually supporting manner. The programs will be rescheduled to match market preference. Amid an anticipated tough competition in the television business, the program reshuffle will therefore be made from time to time. Such dual channel operation will increase flexibility, rapidity and timeliness in program rescheduling. As for the kids and family channel, which clearly is a niche market, the Company will preliminarily penetrate the children and family segments by offering kids variety programs together with imported children programs that are informative and useful to the society.
In operating the digital TV channels, the Company will leverage on the existing resources, personnel, business partners and relationship, irrespective of the different identity of the said new channels, because this is an easier and faster way of building acquaintances among the audience, while saving both cost and time for investments and improving management of resources, personnel
- 30- Opinion of the Independent Financial Advisor on acquisition of assets and partners. The Company has a large stock of contents that have never been broadcast and has maintained longstanding business relationship with several content providers at home and abroad. It also has a vast number of customers, who are “advertisers” and have used Channel 3 services on a regular basis, and has a huge quantity of “viewers” who are fans of Channel 3 programs. These will enable the Company to rapidly develop the new channels with diverse content and easy access to the audience. It can at the same time promote the new channel programs via Channel 3. In addition, the Company has prepared the premises by building new studio and an office on rented areas in the same compound as Maleenont Building on Rama 4 Road, Bangkok, and must procure digital television equipment that is of high efficiency and compatible with the system, including television broadcasting equipment and computer software for content production such as Enterprise MAM+MCR system, communication system, IT service, graphic, content production equipment, outside broadcasting equipment, electricity system, etc.
The Company plans to replace the current analog system Channel 3 with the HD Variety Channel 33 in digital system after the concession agreement with MCOT expires in March 2020 so as to ensure continuity in its business operation.
3.2 Benefits of the transaction
(1) Continuity of business operation
The concession agreement on Channel 3 broadcast operation executed with MCOT will expire in 2020. Under the NBTC’s policy, the existing state-owned television channels are permitted to continue operation for a certain period of time, whereas the privately-run TV stations, including Channel 3, may carry on operation until the end of period specified in their concession agreement made with the government sector. In the future when the television broadcast with new technology is launched or the development of digital television network nationwide is fully completed and the digital TV has become widely accepted, the original channels will be phased out or disappear and television broadcast will be conducted on newly introduced channels in the digital system only. As such, the acquisition of three Digital TV Licenses for a term as long as 15 years (ended 2029), comprising two variety channels and one kids and family channel, will help strengthen investors’ confidence in continuity of television broadcasting business, which is the Company’s core activity, after expiry of the concession agreement for Channel 3 operation. In the future, the Company plans to replace the current analog system Channel 3 with the digital HD Variety Channel 33.
(2) New income-earning sources
The acquisition of the three digital TV channels, which are “new channels,” will increase income-earning sources for the Company as advertising income is its primary revenue. The Company has numerous business partners which are “advertisers” and have provided continued supports for a long time since Channel 3 has been widely recognized as the top- ranking TV station among the educated “urban” viewers with high purchasing power and as the second-ranking channel among “rural” viewers with simple lifestyles who are the majority of the country’s total population.
Such popularity of Channel 3 helps to draw a great number of advertisers to promote their products and services through the channel. Currently, however, Channel 3 has fully used its advertising airtime according to the NBTC’s notification stipulating that the total amount of time for advertisements for a whole day shall not exceed an average of 10 minutes per hour. This has hindered Channel 3 from increasing the advertising airtime in order to boost its revenues. The revenue growth is therefore limited by the increase in advertising rates.
Accordingly, the acquisition of additional TV channels will enable the Company to increase revenues from advertising without the above constraint. In view of this coupled with the
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advantages from an ability to use Channel 3 to promote the new digital TV channels, the existing vast audience base of Channel 3 and a large number of customers who are advertisers and have regularly used services from Channel 3, it is expected that the new channels will rapidly gain popularity among viewers and receive support from advertisers, thereby helping to increase revenues from advertisements.
(3) An increase of employee satisfaction
The acquisition of new income-earning sources will provide an opportunity to generate more employment, revenues and career satisfaction among existing staff members, including artists, actors/actresses and hosts working for Channel 3. They will have career advancement opportunities together with the new TV channels’ prosperity. This will also help to motivate these talented personnel to continue working with the Company and assist in developing the TV station in the long term.
At the same time, the acquisition of new TV channels will prompt the Company to recruit new talented personnel/teams, thus helping to broaden viewpoints and further develop the organization as well as enhance its strength.
(4) A more efficient use of existing resources and content
The Company has engaged in television broadcasting, as its core business, and has operated Channel 3 for almost 40 years. It has a large and diverse amount of quality resources essential for television operation, as well as quality contents that have not yet been fully utilized due to the limited availability of television channels as the Company operates only one TV station. Thus, the acquisition of three additional channels with the use of existing resources and personnel will not only help to quickly create viewers’ acquaintance, but also ensure worthwhile utilization of current resources and contents. Besides, since such newly acquired channels do not require a total new investment, the Company will bear a lower cost than other new operators and will achieve economies of scale and higher returns in the long run.
(5) Better customer servicing from more diverse types of services
The new channels will be clearly differentiated from Channel 3 and will have their individual identity. The kids and family channel will have a distinct identity as already perceivable by the audience. The SD variety channel and HD variety channel (excluding the programs to be run in parallel with Channel 3) will also have their own uniqueness, targeting on a smaller, more specific market than that of Channel 3. As such, the Company will be able to deliver a wider variety of services to better meet diverse needs of the audience. This will be beneficial to the niche market advertisers such that they could save expenses, increase efficiency in advertisement spending and more truly respond to their customers’ demand. Meanwhile, this will encourage more new advertisers to promote their products through television media.
(6) An increase in market share in niche market media
The emergence of numerous digital TV channels under the NBTC’s spectrum licensing this time could slash Channel 3’s market share. However, the Company will acquire new channels that will have their own identity with a focus on more specific target groups. Thus, it will be able to additionally garner a market share in the niche market media segment that can compensate the slashed market share of Channel 3 resulting from a loss of certain viewers who have different tastes for TV programs. This fits well with the upcoming market environment where there will be a number of new TV channels in the same system (digital) emerging at the same time, thereby increasing customer satisfaction.
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(7) A broader and stronger reach to the audience
The entry into the digital TV era, by transforming from the conventional analog system, marks a radical change in Thailand’s television industry. It will allow the public to access a broader variety of news, information, entertainment contents and services more extensively through the development of nationwide television network system and the NBTC’s policy to promote the public’s access to television broadcasting. As such, “television programs” can reach the audience to a broader extent. As well, the Company will have an opportunity to build a stronger tie with the society and viewers.
The NBTC encourages the public’s access to the digital TV broadcasting and will give a discount coupon to around 22 million households nationwide to purchase digital TV sets and set-top box with digital converter in a bid to help save their expenses and motivate them to watch digital TV programs. The coupons will be distributed in the areas accessible to the digital TV broadcasting (under the network expansion plan, the digital broadcast will cover about 95% of the country in the next four years). Furthermore, to enable a more rapid access to the digital TV without awaiting such network expansion, the NBTC has set out the Must Carry Rule, under which service providers in satellite and cable platforms “must” make available to their viewers the digital TV programs in the ‘must carry status’ such as the digital free TV channels. This will pave the way for a broader and quicker accessibility of the digital TV broadcast to the public in general.
(8) An increase in value added and favorable returns for shareholders in the long run
The acquisition of the Digital TV License is an investment in business in which BEC World Group has had considerable experience and strong competitive edge, leading it to receive the expected returns on such investment better than the investment in other type of business in which it has no skill and experience. Despite the anticipation that the new channels will not bring in much profit in the initial period, it is expected, from the IFA’s study, that if the business operation is carried out as planned, a strong profit will be earned from the digital TV business. Throughout the 15-year term of the Digital TV License, the NPV of this project is estimated at Baht 23,236 million, with IRR of 46.25% per year and payback period of 6.49 years. Therefore, apart from ensuring long-term continuity of the Company’s core business, this transaction will help create value added and enable the Company to uninterruptedly continue its television broadcast operation after expiration of the concession for Channel 3 in March 2020, thus generating higher returns for its shareholders in the long run.
3.3 Impacts and risks from the transaction
1) Risk from potential loss at the initial period of investment
BECM will bear a substantial amount of fixed cost from business operation throughout the Digital TV License term. One of the major items is amortization of the Digital TV License for three channels worth Baht 6,471 million. If BECM uses the straight line method, the amortization cost throughout the 15-year license term will be approximately Baht 431.40 million per year. The other major item is television network service fees of about Baht 276 million per year (this is the rate chargeable after completion of the entire network installation), which, combined with the license amortization cost, will make up a total expense per year of around Baht 707.40 million. It will also bear program production costs, other operating expenses and depreciation cost of property and equipment. In the initial period, product owners or advertising agencies may still not be confident in the popularity or rating of programs aired on the new TV channels. Besides, at the early stage of the switch-over to the digital TV, the digital terrestrial TV network may not yet be completely developed to fully cover service areas nationwide, thus likely leading a large group of viewers to concentrate in the original free TV channels. Hence, if advertising income in the initial period cannot be
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achieved as targeted so as to amply cover those costs and expenses, BECM will likely operate at a loss which will consequently have an impact on the overall performance and profit of the Company, as the parent of BECM, and also on dividend obtainable by shareholders in the future.
However, with the existing resources, working teams, personnel and business partners of Channel 3, the Company will be able to easily and quickly gain viewers’ acquaintance with the new channels. It can utilize Channel 3, which has a strong reputation, audience base and rating, to promote the new channels, thus helping to save cost and time for investment.
In addition, Thai PBS, the network service provider, plans to install its network stations to reach the 97% coverage by 2015, which is sooner than the NBTC’s schedule. When the Must Carry Rule takes effect, all cable TV and satellite TV subscribers will be able to access digital TV programs, thereby helping to expand digital TV viewership base and relatively encouraging advertisers to use digital TV media. This will lead to stronger growth in overall advertising revenues and, hence, help to boost the Company’s income.
2) Risk from return on investment not coming out as projected
At the early stage of the digital TV operation, competition will come not only from digital TV broadcasters (commercial service) who will concurrently launch as many as 24 channels, but also from the original analog free TV broadcasters. The digital TV channels will initially be run in parallel with the original free TV channels until the free TV channels are phased out or their concession expires or the NBTC decides to end their broadcast. Television media business will likely be prone to intensified competition, triggered by an instant increase in number of free TV by at least 24 new channels (commercial service), from originally only six channels, after the NBTC has granted the Digital TV License to bid winners. It is therefore expected that product/service owners and advertising agencies will have more choices of television media which may lead to a decrease in advertising rates in the future. Income from advertising fees is the main revenue source of this business. Such income does not rely totally on factors that are controllable by the management, but partly depends on growth in the overall advertisement market which relates directly to national economic situation that is presently threatened by internal political instability and thereby causing a delayed spending of advertising budgets.
There is also another risk factor from a delay in the switch-over from analog to digital TV broadcasting, resulting from both the installation of digital TV network by service providers, and the reception side, i.e. installation of set-top box or television sets accessible to digital signal by households that will be provided with a discount coupon by the NBTC as from April 2014 onwards.
Given that BECM is affected by these risk factors such that it is unable to grow income from advertising as planned or its costs and expenses are materially higher than the projection, return on investment will then fall below the estimate and may hurt overall performance of the Company and dividend receivable by shareholders in the future. Channel 3 may also be affected by such tougher competition and may lose some of its market share due to the growing number of players and the declining advertising rates.
3) Risk from lowered liquidity and from liabilities arising from the obligation to pay the high- valued License fees
This transaction involves a huge investment cost of approximately Baht 11,266.75 million, comprising 1) fees for three Digital TV Licenses totaling Baht 6,471 million, payable in six installments within five years, counting from the date of obtaining the License; 2) network service fees chargeable from April 1, 2014 to June 16, 2028 totaling Baht 3,795.55 million,
- 34- Opinion of the Independent Financial Advisor on acquisition of assets
payable on a yearly basis at the maximum value after full completion of the network station installation of Baht 276 million per year; and 3) investment in space renting and premises renovation for constructing studio and procurement of digital television equipment totaling Baht 1,000.2 million. Such huge investment cost could affect the Company’s liquidity. However, the investment will be gradually made, not payable in one lump sum. Thus, it is expected that cash on hand and cash receivable from future operation will be sufficient for financing such investment.
Nonetheless, for every installment of the License fees that is payable in cash based on the payment schedule set forth by the NBTC, BECM is obligated to place a bank guarantee against the unpaid balance of the fees. The Company therefore has to record such item under liabilities caption in its consolidated financial statements and gradually write it off according to the cash payment made in each installment or based on the reduced amount of such guarantee, thus resulting in an increase in liabilities and debt to equity ratio of the Company and its subsidiaries. As of December 31, 2013, the Company and its subsidiaries had total liabilities of Baht 3,081.17 million and total equity of Baht 9,114.90 million, representing a debt to equity ratio of 0.34 time. When aggregating with contingent liabilities as of February 10, 2014 under the bank guarantee for the License fees with an outstanding unpaid balance, after payment of the first installment, of Baht 5,362.73 million (equal to remaining fees plus VAT), and the bank guarantee for the network service fees (equal to 5% of agreement value throughout the agreement term plus VAT), the total liabilities will become Baht 8,567.93 million. The equity, after adjusted down by dividend payment for 2013 to be made on May 27, 2014 in a total amount of Baht 2,800 million (right to such dividend remains uncertain, subject to approval from the shareholders’ meeting to be held on April 28, 2014), will decrease to Baht 6,314.90 million. Assuming that there is not any change in any other financial items, the debt to equity ratio of the Company and its subsidiaries will edge up to 1.36 times.
Moreover, BECM is obligated to pay a guarantee fee for the bank guarantee placed against payment of the outstanding License fees at a rate specified by the guarantor bank, with the maximum guarantee amount of Baht 5,486.76 million.
Financing sources for the acquired assets under this transaction will firstly come from internal working capital of BEC World Group and, if this is inadequate, will then be acquired from borrowing from commercial banks. The group has experienced favorable performance over the past several years. In 2011-2013, the Company and its subsidiaries posted a net profit of Baht 3,629.60 million, Baht 4,937.14 million and Baht 5,754.21 million respectively and, as of December 31, 2013, had total cash and short-term investments of Baht 5,788.57 million, indicating that they have sufficient liquidity.
4) Risk from failure to obtain ratification from the shareholders for the entry into the transaction
In entering into this transaction, BECM has completed the process of auction and payment for the License fees, application for issuance of the Digital TV License for three categories, and execution of the Network Services Agreement, which are the preconditions to be fulfilled before obtaining the License. The Company, as BECM’s parent, has not yet obtained approval from the shareholders’ meeting for its subsidiary to enter into the proposed transaction. This is because the transaction is of competitive bidding nature in which BECM is required to bid against a number of unrelated third parties in order to obtain the License and any advance disclosure of the bid price or other sensitive information to the third parties may affect the outcome of the auction.
The Company will propose details of the entry into the transaction to the 2014 Annual General Meeting of Shareholders to be held on April 28, 2014 so as for the shareholders to give ratification for the transaction with a required affirmative vote of not less than three-
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fourths of the total votes of shareholders attending the meeting and having the right to vote. In the event that the shareholders’ meeting resolves not to ratify the transaction that has already been executed by BECM, BECM will subsequently be unable to proceed with the business operation under the License. The License will then be deemed invalid and BECM be deemed to have breached the agreement with the NBTC and Thai PBS. As such, the following ensuing impacts will be posed on BECM and/or the Company:
1) BECM may not request a refund of the License fees already paid to the NBTC and is still obliged to completely pay the remainder of the fees to the NBTC (the License fees amount to Baht 6,471 million in total).
2) If BECM fails to pay the remainder of the License fees to the NBTC within the specified period of time, the NBTC has the right to demand the guarantor bank to pay the fees on behalf of BECM until the fees are completely paid in accordance with the bank guarantee provided to the NBTC.
3) In the event that the bank has paid the fees to the NBTC on behalf of BECM, the bank shall be entitled to demand BECM to pay back the fees together with other expenses and damages (if any) in accordance with terms and conditions agreed upon with the bank. In this regard, the Company has furnished guarantee for the guarantee line provided by such bank for BECM.
4) BECM may face legal action brought by the NBTC to demand indemnification for other damages such as an opportunity loss arising from non-receipt of annual License fees (2% of revenues before deduction of expenses) and the yearly contribution payable to the Broadcasting and Telecommunications Research and Development Fund for the Public Interest (2% of revenues before expenses earned directly and indirectly from advertisements and other revenues from services provided under the License), including other expenses to be incurred if the NBTC has to re-organize an auction to acquire a new licensee in replacement of BECM. In any case whatsoever, the NBTC must prove to the court that it actually suffers from such damages since this matter has not been specifically prescribed in details by law.
As regards the Network Services Agreement executed by BECM with Thai PBS, the security placed under such agreement, i.e. guarantee from a commercial bank in the amount of Baht 124.03 million (equal to 5% of agreement value throughout the agreement term plus VAT), may be confiscated and BECM will be held liable for paying the outstanding balance of the network service fees plus VAT to Thai PBS until the end of the agreement term (total service fees plus VAT are Baht 4,061.24 million).
As of August 23, 2013, the latest closing date of register book, the Company’s major shareholder was the Maleenont Family which owns 47.03% of total paid-up shares of the Company. Therefore, at the 2014 Annual General Meeting of Shareholders, the voting on ratification of the proposed asset acquisition transaction will depend significantly on votes cast by the Maleenont Family.
3.4 Adequacy of funding source for the asset acquisition
The asset acquisition transaction has a total value of consideration of Baht 11,266.75 million (exclusive of VAT), with details as follows:
- 36- Opinion of the Independent Financial Advisor on acquisition of assets
Acquired assets Consideration Payment terms payable (Baht million) 1. Digital TV License for three categories 6,471.00 Payable in six installments within about five years from the date of obtaining the License 2. Network Services Agreement for one 3,795.55* Payable on a yearly basis and chargeable from HD channel (valued at Baht 2,277.33 April 1, 2014 to June 16, 2028, with service fees million) and two SD channels (valued at (after completion of nationwide network Baht 1,518.22 million) installation) equal to Baht 13.8 million/month for HD channel and Baht 4.6 million/month for SD channel 3. Studio and equipment for digital TV 1,000.20 To be invested in 2014 broadcasting Total 11,266.75 Note: * Thai PBS has the right to adjust the service fees every three years based on the inflation rate of the foregoing years and as announced by the Bank of Thailand and reliable financial institution.
Details of yearly payments are as follows:
(Unit: Baht million) 2014 2015 2016 2017 2018 2019 2020-2027 2028 Total (May-Dec) (Jan-June) License fees 1,459.1 1,053.1 1,091.2 1,091.2 888.2 888.2 - - 6,471.00 Network service fees 97.41 258.87 276.0 276.0 276.0 276.0 276.0 127.27 3,795.55 (amount/year) Estimated investment in 1,000.2 1,000.20 premises renovation for studio construction and procurement of equipment* Total 2,556.71 1,311.97 1,367.20 1,367.20 1,164.20 1,1164.20 2,208.00 127.27 10,266.55 Note: * Excluding investment in additional refurbishment which is expected at 3%-15% of initial investment cost in each year throughout the period of business operation under the Digital TV License.
To finance the asset acquisition transaction, BECM will initially use its own equity together with financial support from the Company. Such funding support to BECM will come from cash flow from operation of the Company and its subsidiaries. Moreover, BECM will in the future continue to use its own funds derived from cash flow from operation of the digital TV business. Based on net cash flow under financial projection of BECM (see table showing cash flow from digital TV business operation of BECM in 2014-2029 in Item 4.1 ‘Fairness of price’), it appears that cash flow paid will be higher than cash flow received during 2014-2017 or cash flow will be in deficit of approximately Baht 3,255 million. For such of period, the cash flow received from the operation of BECM is not enough for cash flow paid so that the source of the funding will come from the capital of BECM and come from the financial support from the Company to run the BECM’s business.
According to the Company’s consolidated financial statements for the latest accounting period as of December 31, 2013, the Company and its subsidiaries reported a net profit of Baht 5,754.21 million and had outstanding cash and short-term investments of Baht 5,788.57 million.
Therefore, we are of the opinion that the Company has an adequate source of funds to render financial support for BECM to enter into this transaction. If there is no need for borrowing, the Company will consider utilizing working capital available from its group. Thus, it will not bear any debts and interest expenses from borrowing from external financing sources.
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4. Fairness of price and conditions for the transaction
4.1 Fairness of price
Under this transaction, BECM will acquire the national commercial digital TV licenses for three categories from the NBTC, comprising one HD variety channel, one SD variety channel and one kids and family channel, for a term of 15 years at the total bid price of Baht 6,471 million. BECM has entered into the Digital Terrestrial Television Network Services Agreement for SD and HD television channels with Thai PBS with service fees chargeable from April 1, 2014 to June 16, 2028 (a period of 14 years, 2 months and 16 days) in the total amount of Baht 3,795.55 million. Moreover, to efficiently operate the digital TV business, BECM plans to invest in premises renovation, construction of studio and procurement of digital TV equipment that is of high efficiency and is compatible with the system at the total investment cost of approximately Baht 1,000.20 million.
BECM will operate digital television broadcasting on three channels: Channel 33 in HD variety category, Channel 28 in SD variety category and Channel 13 in kids and family category. Details of the administration of each channel are as follows:
Channel 33 HD Variety: This channel will broadcast 24 hours a day, focusing on new and interesting content similar to the existing analog system Channel 3. In the first six years (2014 - March 2020), BECM will manage all programs on this channel separately from Channel 3, but some programs of Channel 3 will be broadcast in parallel on the digital Channel 33. Then from April 2020 onwards, all programs on Channel 33 HD will be reshuffled to accommodate the programs transferred from Channel 3 after the concession agreement for “Channel 3” made with MCOT expires in March 2020.
Channel 28 SD Variety: Broadcasting 24 hours a day, this channel will support management of TV programs of the group as the current Channel 3 has a rather tight schedule and cannot easily change the programs. The acquisition of Channel 28 SD will help increase flexibility and efficiency in the group’s TV program management. This channel will emphasize variety programs and new programs that have never been on-air.
Channel 13 Kids and Family (Children Channel): This channel will broadcast around the clock as well. It will provide a mix of kid variety programs and imported children programs that are useful and informative to the society.
To identify reasonableness of the transaction price, we have analyzed and compared the investment cost of the digital TV business with the total cash flow to be received from such investment by estimating net present value of free cash flow, internal rate of return and payback period based on cash flow projection of BECM’s digital TV business over a period of 15 years from the first date of broadcasting in the digital system (April 1, 2014 - March 31, 2029).
We have prepared the said cash flow projection of the digital TV business based on the management’s forecast and have identified the viability of the assumptions based on information obtained from the Company and from interviews or enquiries with its management together with analysis of other information relating to the digital TV business. Then, we have adjusted some financial items so as to reflect market condition and competition in this industry, including related industry situation and overall economy. Such financial projection and assumptions have been established under the present economic environment and the information perceivable at the time of preparing this study only. If the economic situation and other external factors which have an impact on BECM’s digital TV business change significantly from the assumptions, the project value appraised herein will change as well and it could cause our opinion to change accordingly.
Key assumptions used in the financial projection are as follows:
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1) Advertising income
BECM is prepared to broadcast on all three digital TV channels which will provide a mix of programs produced by itself and those procured from freelance producers and content providers who have been longstanding alliances of Channel 3.
BECM has conducted marketing campaigns and advertising packages to help promote the new digital TV channels among Channel 3’s existing clientele, which has received tremendous response. Advertising sales are made both to retail customers in general and in packages to advertising agencies. All programs will be subject to unequal pricing, depending on amount of advertising airtime, broadcast period, attractiveness of programs, nature of customers, relationship, bargaining power, and other benefits receivable by BECM and BEC World Group.
Advertising income is estimated based on number of broadcasting hours per day, number of minutes for advertisements per hour, advertising rate per minute, and occupancy rate. BECM will begin broadcast trial-run on April 1, 2014 and expects to commence official broadcast as from July 1, 2014.
BECM will broadcast its TV programs around the clock and bring in advertising income from those programs (exclusive of the re-run programs). The total amount of time for advertisements for each day will not exceed an average of 10 minutes per hour, according to the Broadcasting Act B.E. 2551, Section 23, stipulating that advertising and business service provision may not exceed a maximum amount of 12 and a half minutes per hour and the total amount of time for advertisements for a whole day must not exceed an average of 10 minutes per hour.
Advertising rate per minute This is based on the management’s forecast. At the early stage of operation, viewers will not yet be accustomed to the digital TV and no rating on the new channels among the audience has yet been available. Besides, there will still be a limited access to the digital TV broadcast which is a new technology different from the conventional analog system that has been in use for longer than five decades, depending on the period of time required by network providers to complete their network expansion and readiness of TV broadcast receivers. This is a factor crucial to advertisement buying decision by agencies and product owners. Thus, the management has to exercise due care in determining advertising rates. Advertising sales have been partially made and received tremendous response, propelled by longstanding trust in quality and reputation of Channel 3. Advertising rates are not equally charged by the new channels. The average selling price charged by HD channel in the first year will be about 40% higher than those of SD and children channels (SD and children channels will charge an equal selling price in the first year). Advertising rate of HD channel is set to grow 8% per year in 2014 - 2019 and 5% from 2020 onwards. SD channel’s advertising rate will increase 8% per year throughout the projection period, while advertising rate of children channel will grow 3% per year during 2014 - 2020 and 5% per year after that, which is lower than growth rates of HD and SD channels because children channel is a new channel and has a more focused target group than variety channels.
As from April 2020, after the concession agreement signed by the subsidiary (Bangkok Entertainment) with MCOT for the operation of “Channel 3” expires in March 2020, the programs on variety channel will be rescheduled to accommodate the programs transferred from the original Channel 3 to HD channel. Revenues from Channel 3 will be totally incorporated into the projection in replacement of the projection for HD channel for the period from April 2020 until the end of this projection period or the end of the Digital TV License held by BECM. Revenues earned by Channel 3 are estimated based on revenues recorded in 2013, assuming to grow by 8% per year in the next four years (2014-2017) and then by 5% per year from 2018 onwards according to the average growth rate of the Company’s revenues in the past three years of 10.50%. The projected decrease in such revenues growth rate in the later years is based on the management’s forecast that Channel 3’s growth could be affected by the increasing number of competitors subsequent to the concurrent opening of 24 new
- 39- Opinion of the Independent Financial Advisor on acquisition of assets digital TV channels, coupled with an expectation that in about the next four years (by 2018) digital TV will gain more popularity which will further intensify the competition.
Occupancy rate Projection of occupancy rate is different for each channel.
Occupancy rate for HD channel is estimated at 75% from the start of broadcasting in 2014 until March 2020 and at 100% from April 2020 onwards, based on the current occupancy rate of Channel 3 because during such period BECM will broadcast all Channel 3 programs on the new HD Channel 33.
Occupancy rate for SD channel is projected at 75%, remaining constant throughout the projection life.
Occupancy rate for children channel is projected to be 33%, remaining constant throughout the projection period.
2014 2015 2016 2017 2018 2019 2020** 2021 (Apr-Dec) Revenues from HD channel (Baht million) 1,159 2,483 2,689 2,897 3,128 3,379 18,538 24,714 Revenues from SD channel (Baht million) 828 1,774 1,921 2,069 2,235 2,413 2,614 2,815 Revenues from children channel (Baht million) 368 752 777 798 822 846 891 933 Total revenues 2,355 5,009 5,387 5,763 6,185 6,638 22,042 28,462 Note: * In 2014, BECM will start to earn revenues from broadcasting on July 1, 2014. ** From April 2020 until the end of the projection period, revenues of HD channel will be replaced by revenues from Channel 3.
2022 2023 2024 2025 2026 2027 2028 2029 (Jan-Mar) Revenues from HD channel (Baht million) 25,950 27,248 28,610 30,041 31,543 33,120 34,776 9,129 Revenues from SD channel (Baht million) 3,040 3,283 3,556 3,830 4,136 4,467 4,838 1,285 Revenues from children channel (Baht million) 980 1,029 1,083 1,134 1,191 1,250 1,316 340 Total revenues 29,970 31,560 33,249 35,004 36,869 38,837 40,930 10,753
2) Cost of program production
Cost of program production is divided into two major items, drama production and other program production. The Company will both make its own production and join hands with external producers, similar to Channel 3’s current operation. The Company expects that the average production cost of each channel will be unequal. Production cost for HD channel is estimated at Baht 230,000 per hour, SD channel at Baht 165,000 per hour, and children channel at Baht 115,000 per hour. Production cost of HD and SD channels is set to grow 5% per year, remaining constant throughout the projection period, while children channel’s production cost will grow 3% per year during the first six years (2014-2019) and 5% per year from 2020 onwards.
Cost of personnel for program production of HD and SD channels is estimated to be 15% of cost of personnel of Channel 3 in 2013, assuming to be equal to the percentage of HD channel’s revenues projected for 2014 (annualized) to Channel 3’s revenues in 2013, and is projected to grow by 5% per year throughout the projection period according to the average growth rate of Channel 3’s expenses in the past three years. Children channel’s cost is estimated to be 7% of cost of personnel of Channel 3 in 2013 and to increase by 3% per year in the first six years (2014-2019) and by 5% per
- 40- Opinion of the Independent Financial Advisor on acquisition of assets year after that because children channel will in the initial period have a smaller amount of broadcast time than other channels.
From April 2020 onwards, with the current Channel 3 programs to be broadcast on HD channel, costs and expenses of Channel 3 will be incorporated into the projection in replacement of the projected costs of HD channel from April 2020 until the end of the projection period or the expiry of the Digital TV License held by BECM. Costs and expenses of Channel 3 are estimated based on costs and expenses in 2013 and assumed to grow by 8% per year during 2014-2017 and 5% per year from 2018 onwards.
Space rental Rented space is estimated at 1,412.5 square meters per channel at a rental rate of Baht 450 per square meter, with an increase rate of 5% every three years based on the existing rental agreement of the Company.
License fees It is expected that BECM will amortize the License fees by straight line method. Amortization cost is estimated from the total bid price for the three licenses of Baht 6,471 million with amortization period equal to the License term of 15 years, or amounting to Baht 431.40 million per year for the three licenses. The amortization will start on the first date of official operation of the digital TV business on April 1, 2014.
Annual License fee and yearly contribution Under the NBTC’s notification, licensees must pay the annual fee at 2% of revenues before expenses and must pay a yearly contribution to the Broadcasting and Telecommunications Research and Development Fund for the Public Interest at 2% of revenues before expenses earned directly and indirectly from advertisements and other related revenues.
Network service fees According to the Network Services Agreement, BECM is to pay network rental service fees for three digital TV channels to Thai PBS at a total of around Baht 276 million per year. Such fees are estimated to increase 3% every three years based on such agreement, whereby Thai PBS is entitled to revise the fees every three years in line with the inflation rate of the foregoing year and as announced by the Bank of Thailand or reliable financial institution.
3) Selling and administrative expenses
Selling expenses for all channels are projected at 5% of sales throughout the projection period.
Administrative expenses for HD and SD channels are each estimated at 15% of Channel 3’s administrative expenses in 2013, assuming to be equal to the percentage of HD channel’s revenues projected for 2014 (annualized) to Channel 3’s revenues in 2013, and are forecast to grow by 5% per year throughout the projection period.
Personnel expenses for HD and SD channels are projected to be 5% of Channel 3’s personnel expenses in 2013 and to increase by 5% per year throughout the projection period.
Such growth rate of selling and administrative expenses is forecast based on the average growth rate of Channel 3 over the past five years.
Administrative expenses for children channel are estimated to be 7% of Channel 3’s administrative expenses in 2013 and to increase by 3% per year in the first six years (2014-2019) and by 5% per year from 2020 onwards.
Personnel expenses for children channel are projected to be 2.5% of Channel 3’s personnel expenses in 2013 and to increase by 3% per year in the first six years (2014-2019) and by 5% per year from 2020 onwards. The projected expenses of children channel are lower than other channels
- 41- Opinion of the Independent Financial Advisor on acquisition of assets
because children channel will have a smaller amount of broadcast time than other channels, leading it to bear a smaller amount of expenses.
2014 (Unit: Baht million) (Apr-Dec) 2015 2016 2017 2018 2019 2020 2021 Coast of program production 2,285 4,446 4,645 4,844 5,044 5,153 11,457 13,677 Selling and administrative expenses 308 516 547 579 613 650 2,852 3,756 Total costs and expenses 2,593 4,962 5,192 5,423 5,657 5,803 14,309 17,433
2029 (Unit: Baht million) 2022 2023 2024 2025 2026 2027 2028 (Jan-Mar) Coast of program production 14,339 15,044 15,773 16,521 17,318 18,169 19,038 4,981 Selling and administrative expenses 3,948 4,149 4,362 4,585 4,820 5,067 5,328 1,399 Total costs and expenses 18,287 19,193 20,136 21,107 22,139 23,237 24,366 6,472
4) Working capital Average collection period 30 days Average repayment period 30 days
The projection of average collection period and average repayment period is based on the Company’s policy on management of working capital for business operation.
5) Capital expenditure
BECM has a policy to make additional investments to gear up for the digital TV broadcasting. The total capital expenditure in 2014 is estimated at approximately Baht 1,000.20 million, comprising investment in premises renovation for constructing studio and broadcasting system of approximately Baht 530.20 million and procurement of digital television equipment such as broadcasting equipment and computer software for content production including management system, IT service, graphic, OB van, camera, studio equipment, and outside broadcasting equipment with total cost of approximately Baht 470 million.
From the projection, BECM will make additional investments in new equipment and replacement of old equipment. Capital expenditure in the first five years (2015-2019) is estimated at 5% for HD and SD channels and 3% of initial investment budgets for children channel, amounting to Baht 43.34 million per year. Since BECM will initially procure brand-new equipment, there will be little investment in old equipment replacement in the early period. From 2020 onwards, capital expenditure is projected at 15% for HD and SD channels and 7% of initial investment budgets for children channel, amounting to Baht 123.36 million per year.
Depreciation of these assets is estimated by straight line method based on the projected useful life of 5 years.
(Unit: Baht million) 2014 2015 2016 2017 2018 2019 2020 2021 Investment in premises 530.20 ------and studio Investment in equipment 470.00 43.34 43.34 43.34 43.34 43.34 123.36 123.36
- 42- Opinion of the Independent Financial Advisor on acquisition of assets
(Unit: Baht million) 2022 2023 2024 2025 2026 2027 2028 2029 Investment in premises ------and studio Investment in 123.36 123.36 123.36 123.36 123.36 123.36 123.36 123.36 equipment
6) Income tax
Corporate income tax for 2014-2029 is estimated at 20%11 of profit before tax. In any year that BECM incurs a net loss, it can enjoy a tax loss carry forward for not more than five accounting years.
7) Discount rate
Discount rate used for estimating the net present value of cash flow of this project is 13.28%, which is calculated from cost of equity (Ke) because the investment cost will be self-financed from equity without using any loans.
Calculation of Ke: Ke = Rf + (Rm – Rf) Where: Risk free rate (Rf) Risk free rate of return on investment as of January 10, 2014 (the date on which the NBTC notified BECM in writing of auction results) equal to 4.27% per year, based on average bid yield on the government bond with maturity of 15 years, which is a period of time that could reflect investment condition in different time periods better than shorter-term data and is consistent with the License term (available from www.thaibma.or.th). Beta () A variance between market return and closing market price of the Company’s shares, based on weekly return on the SET and return on the Company’s shares in the past three years, which is a period of time that could reflect investment condition in different time periods better than shorter-term data, up to January 10, 2014, equal to 0.946 (source: Bloomberg). Rm Average rate of return on the SET over the past 25 years, a period that could reflect investment condition in different time periods better than shorter-term data (SET data from January 1989 to December 2013), equivalent to 13.79% per year.
11 The IFA is of the opinion that upon a lapse of the period specified under the Royal Decree, issued under the Revenue Code on Tax Exemption (No. 555) B.E. 2555, stipulating collection of corporate income tax rate at 20% for an accounting period starting on or after January 1, 2013 but not later than December 31, 2014, the said corporate income tax rate of 20% will remain in effect because it will help enhance the country’s competitiveness and support the forthcoming advent of Asean Economic Community in 2015. Since many of AEC member countries collect taxes at a rate lower than Thailand, it is unlikely for Thailand to levy a high tax rate so as to maintain domestic investment level and promote foreign direct investment. (The shareholders can find more information from the research paper, titled “Reduction of Corporate Income Tax: A Gain or Loss for Thailand,” dated August 2012, written by Bank of Thailand’s academic team, available at http://www.bot.or.th/Thai/EconomicConditions/Thai/South/EconomicPapers/ReasearchPaper/Corporate%20i ncome%20tax%20rate.pdf)
- 43- Opinion of the Independent Financial Advisor on acquisition of assets
Table summarizing cash flow projection for digital TV business in 2014 - 2029
(Unit: Baht million) 2014 2015 2016 2017 2018 2019 2020 2021 Total revenues 2,355 5,009 5,387 5,763 6,185 6,638 22,042 28,462 Cost of production 2,285 4,446 4,645 4,844 5,044 5,153 11,457 13,677 Selling and administrative expenses 308 516 547 579 613 650 2,852 3,756 EBIT (238) 47 195 340 528 835 7,733 11,030 Less Tax expenses - - 1 68 106 167 1,547 2,206 Profit after tax expenses (238) 47 194 272 422 668 6,187 8,824 Add Depreciation 424 640 649 657 666 575 491 507 Add/(Less) Working capital (6) (41) (15) (15) (18) (28) (748) (345) Less Capital expenditure (1,000) (43) (43) (43) (43) (43) (123) (123) Less License fees (1,459) (1,053) (1,091) (1,091) (888) (888) - - Cash flow (2,280) (449) (306) (219) 138 283 5,806 8,862 Accumulated net cash flow (2,280) (2,729) (3,035) (3,255) (3,116) (2,833) 2,973 11,835
(Unit: Baht million) 2022 2023 2024 2025 2026 2027 2028 2029 Total revenues 29,970 31,560 33,249 35,004 36,869 38,837 40,930 10,753 Cost of production 14,339 15,044 15,773 16,521 17,318 18,169 19,038 4,981 Selling and administrative expenses 3,948 4,149 4,362 4,585 4,820 5,067 5,328 1,399 EBIT 11,683 12,366 13,113 13,898 14,731 15,600 16,563 4,281 Less Tax expenses 2,337 2,473 2,623 2,780 2,946 3,120 3,313 856 Profit after tax expenses 9,346 9,893 10,490 11,118 11,785 12,480 13,251 3,425 Add Depreciation 523 539 555 555 555 579 579 231 Add/(Less) Working capital (69) (73) (79) (83) (88) (92) (101) 1,325 Less Capital expenditure (123) (123) (123) (123) (123) (123) (123) 0 Less License fees Cash flow 9,676 10,236 10,843 11,467 12,128 12,844 13,606 4,981 Accumulated net cash flow 21,511 31,747 42,590 54,056 66,184 79,029 92,635 97,616
- Net present value of project Baht 23,236 million - Internal rate of return 46.25% per year - Payback period 6.49 years
The estimated net present value of cash flow from the digital TV business throughout the 15- year License term, using the discount rate derived from cost of equity of 13.28%, is equal to Baht 23,236 million, with IRR of about 46.25% per year which is higher than the cost of equity (Ke) of 13.28%. (Ke is the average of overall rate of return expected by shareholders from their current investments in the Company’s shares, which have not yet included the digital TV business, a new line of business to be undertaken in the future.) Such IRR is therefore considered favorable. The digital TV business’s payback period is around 6.49 years.
- 44- Opinion of the Independent Financial Advisor on acquisition of assets
We have additionally conducted a sensitivity analysis of the financial projection to see impacts on the NPV of free cash flow, IRR and payback period above, by changing two factors of the assumptions from the base case as follows:
1) Increase/Decrease of advertising rate (advertising income) by 10% 2) Increase/Decrease of cost of program production by 10% (excluding increase/decrease of Digital TV License fees and network service fees)
Table illustrating changes in net present value
NPV Average advertising rate (Baht million) 10% decrease Base case 10% increase 10% increase 11,137.37 19,447.09 27,621.73
Base case 14,992.72 23,236.03 31,360.40 Cost of
production 10% decrease 18,135.09 26,978.37 39,095.49
Table illustrating changes in IRR
IRR Average advertising rate 10% decrease Base case 10% increase 10% increase 41.06% 53.03% 66.37%
Base case 34.69% 46.25% 58.29% Cost of
production 10% decrease 28.87% 39.87% 51.24%
Table illustrating changes in payback period
Payback period (year) Average advertising rate 10% decrease Base case 10% increase 10% increase 7.68 6.89 6.28
Base case 7.21 6.49 6.04 Cost of
production 10% decrease 6.77 6.19 4.85
From the sensitivity analysis on changes of the assumptions above, the NPV of free cash flow is estimated in a range of Baht 11,137 million - 39,095 million, with IRR of 28.87% - 66.37%, which is higher than cost of equity (Ke) of 13.28%, and payback period of 4.85 - 7.68 years.
4.2 Fairness of conditions for the transaction
In this transaction, BECM, as the winning bidder for the Digital TV License from the NBTC, is obliged to fulfill a number of conditions prescribed under the NBTC’s Notification Regarding Rules and Procedures for Approval of the Use of Spectrum for Digital Television Broadcasting Services and other relevant notifications, of which the key conditions are as follows:
- BECM must place an auction deposit with the NBTC at 10% of reserve price, or equal to Baht 203 million, must pay the License fees according to the payment schedule set forth by the NBTC, and must furnish a bank guarantee against payment of the unpaid balance of the fees. These conditions are applicable to all licensees on an equitable basis. The payment terms for the License
- 45- Opinion of the Independent Financial Advisor on acquisition of assets fees specified to be made in installments within about five years from the date of obtaining the License, or by 2019, are considered fair and acceptable. BECM will be able to operate the digital TV business after obtaining the License without having to pay the License fees immediately in full. In the initial period of operation, the operating performance may still not be strong enough and the major income from sales of advertising may not yet be fully brought in. As such, the gradual fee payment will be beneficial to all licensees.
- BECM must pay the annual License fee at 2% of revenues before expenses and must pay a yearly contribution to the Broadcasting and Telecommunications Research and Development Fund for the Public Interest at 2% of revenues before expenses earned directly and indirectly from advertisements and other related revenues. These conditions are stipulated under the above NBTC notification and applicable to all licensees on an equitable basis. The amount paid will be in proportion to actual revenues, which is a condition commonly applicable in granting of licenses or rights for business or commercial operation in general.
- BECM must enter into the digital terrestrial television network services agreement with the authorized network service provider within 30 days of officially winning the bid for the Digital TV License. This is one of the preconditions to be fulfilled by all bid winners before obtaining the License to ensure that the television signal of BECM will reach the viewers throughout the country efficiently in HD and SD formats with quality monitored and controlled to meet the standards regulated by the NBTC. BECM already executed the Network Services Agreement with Thai PBS on February 10, 2014, with service fees chargeable from April 1, 2014 to June 16, 2028 of approximately Baht 276 million per year (this is the rate chargeable after full completion of the nationwide network installation), or about Baht 3,795.55 million in total. While Thai PBS has not yet completed the installation of network stations as set forth in the agreement, it will collect the fees at the rate specified for the already installed stations only. Thai PBS will guarantee the quality of its network services. If the broadcast cannot be made beyond the guaranteed service quality, BECM may ask for a discount of service fees on an individual station basis and in percentage of disruption time compared with the monthly service fee of each station. This is also considered a fair condition. Moreover, the determination of service fees under such agreement, the discount of fees or a possible change of service fees every three years based on the inflation rate of the foregoing year and as announced by the Bank of Thailand or reliable financial institution, will be carried out by Thai PBS on an equitable basis for all parties.
- Nonetheless, the Network Services Agreement signed by all License bid winners, including BECM, with their respective service providers will expire in 2028, representing a period less than 15 years. This is consistent with the remaining term of network service license awarded to those service providers (the said license was awarded by the NBTC in 2013 and is valid for 2013- 2028). At the same time, the NBTC is still being in the process of issuing the Digital TV License to the 24 bid winners, with the License expected to take effect in Q2/2014 and be valid during 2014- 2029, thereby leading to an overlap of validity period between the network service license and the Digital TV License. The Company’s management believes that the NBTC will make a remedy in the future in order to prevent any risk from inability to use the digital TV network service for transmitting television signal to viewers throughout the Digital TV License term. After all, the digital TV business is a national-level television broadcasting business undertaking under approval of the NBTC and subject to the NBTC’s rules and regulations and must therefore be protected by the NBTC.
Based on the above reasons, we are of the opinion that the conditions for the transaction are fair and do not cause the Company to lose any benefits.
5. Conclusion of the Financial Advisor’s opinion
In our opinion, the asset acquisition transaction entered into by the subsidiary, BEC- Multimedia Co., Ltd., entailing the bid for and acquisition of the Digital TV License, the entering into the Network Services Agreement which is part of the preconditions to be fulfilled before obtaining the
- 46- Opinion of the Independent Financial Advisor on acquisition of assets said License, and the investment in premises, studio and television equipment that are of high efficiency and compatible with the digital television system with the total transaction value of Baht 11,266.75 million, is deemed essential and appropriate and will help to ensure business continuity for the Company. This is because the Company generates income mainly from sales of advertising through Thai TV Channel 3 (“Channel 3”) which is operated under the concession agreement between its subsidiary (Bangkok Entertainment) and MCOT and such concession will expire in March 2020. At the same time, the NBTC organized an auction for licenses to use allocated frequencies for national commercial digital television broadcasting services on 24 channels for a term of 15 years. This will be a good opportunity to enhance business continuity and expand BEC World Group business into new TV channels that could broaden the viewership base, in addition to the current analog TV broadcasting system, thus helping to strengthen business growth and potential and increase value added and favorable returns for shareholders in the long term.
The Company will gain benefits from the entry into this transaction, comprising an enhanced business continuity after the end of right to operate Channel 3 upon expiration of the concession agreement between the subsidiary and MCOT; new income-earning sources through the three additional TV channels; an increase of employee satisfaction with career advancement opportunities along with growth of the new TV channels; a more efficient use of existing resources and content; better customer servicing; an increase in market share in niche market media as propelled by more diverse services offered through the new TV channels that will be differentiated from the existing channel; a broader and stronger reach to the audience through the developed nationwide network system and the NBTC’s policy to promote the public’s access to the digital TV broadcasting; and an increase in value added and favorable returns for shareholders in the long run.
However, the entering into this transaction could cause some adverse impacts and risks to the Company, including risk from loss incurred at the initial period of investment, risk from return on investment not coming out as projected which may affect overall performance of the Company and dividend receivable by shareholders in the future, and risk from lowered liquidity and from liabilities arising from the obligation to pay the high-valued Digital TV License fees.
In addition, this transaction has been executed before seeking approval from the shareholders’ meeting because the NBTC awarded the licenses by an auction process. Thus, the Company could not know in advance as to whether BECM will win such auction and which categories of the Digital TV License it will win the bid for. The Company therefore could not propose the participation in the said auction and the transaction value for prior approval from the shareholders’ meeting. Moreover, the transaction is of competitive bidding nature in which BECM is required to bid against a number of unrelated third parties in order to obtain the License and any advance disclosure of the bid price or other sensitive information to the general public may affect the outcome of the auction. The Company is accordingly exposed to risk from failure to obtain ratification from the shareholders for the entry into the asset acquisition transaction which has already been executed. This will subsequently lead BECM to be unable to operate business under the Digital TV License and BECM will thereby be deemed to have breached the agreement made with the NBTC. In this case, it may not request a refund of the first installment of the Digital TV License fees already paid to the NBTC and is still obliged to completely pay the remainder of the fees in accordance with the obligation set forth in the letter of guarantee placed with the NBTC. As such, it will lose funds paid for the Digital TV License fees in an amount equal to the bid price plus VAT, or totaling Baht 6,923.97 million (Baht 6,471 million + 452.97 million) and could also face a lawsuit demanding payment for any other damage claims. With respect to the Network Services Agreement, the bank guarantee placed under such agreement may be confiscated and BECM will be obligated to pay the remainder of the service fees to Thai PBS. As regards the adequacy of funding source for the transaction amounting to Baht 11,266.75 million in total, the Company will render financial support to BECM. In view of the Company’s current financial position and the cash flow from BECM’s future operation, and the payment for the acquired assets which is set to be made in installments as per the payment schedule already set forth, we are of the opinion that the Company has an adequate source of funds for this transaction. If
- 47- Opinion of the Independent Financial Advisor on acquisition of assets there is no need for borrowing, the Company will consider utilizing funds entirely from its internal working capital. Thus, it will not bear any debts and interest expenses from borrowing from external financing sources.
To identify reasonableness of the transaction price, we have analyzed and compared the investment cost of the digital TV business with the total cash flow to be received from such investment. According to a projection of cash flow from such business undertaking by BECM over a period of 15 years from the first date of digital broadcasting (April 1, 2014 - March 31, 2029), the net present value of cash flow is estimated at Baht 23,236 million, with internal rate of return (IRR) of 46.25% per year and payback period of 6.49 years. Such IRR is higher than the cost of equity, or Ke, which is equal to 13.28% (Ke is the average of overall rate of return expected by shareholders from their current investments in the Company’s shares, which have not yet included the digital TV business, a new line of business to be undertaken in the future). The said rate of return from this project is therefore considered favorable. However, from a sensitivity analysis on changes in the average advertising rate and cost of program production (10% increase/decrease), the net present value of cash flow is estimated in a range of Baht 11,137 million - 39,095 million, with IRR of 28.87% - 66.37% which is higher than Ke of 13.28%, and payback period of 4.85 - 7.68 years.
Moreover, we are of the opinion that the conditions for the transaction are fair and do not cause the Company to lose any benefits. The conditions pertaining to the Digital TV License are conditions prescribed under the NBTC’s Notification Regarding Rules and Procedures for Approval of the Use of Spectrum for Digital Television Broadcasting Services and other relevant notifications that must be adhered to by all licensees on an equitable basis. Likewise, the conditions under the Network Services Agreement, including the determination of service fees and a possible decrease or change of service fees in the future based on inflation rate or subject to the NBTC’s approval, are deemed fair and equitable for all parties.
Based on the above rationale, we view that the shareholders will gain benefits from the proposed transaction and that the transaction is reasonable with a fair price and fair conditions. Therefore, it is recommended that the shareholders should give ratification for the asset acquisition transaction.
In deciding whether to give such ratification, the shareholders can consider the reasons and opinion of the Financial Advisor as described above. The final decision primarily depends on the individual shareholders’ judgment.
We hereby certify that we have rendered opinion with due care and under professional standards by paying regard to the interest of the shareholders.
Yours sincerely, Advisory Plus Company Limited
- Prasert Patradhilok - (Prasert Patradhilok) President
- Nisaporn Rerk-aram - (Nisaporn Rerk-aram) Managing Director and Operational Controller
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BEC World Public Company Limited Registration No. 0107538000673 3199 Maleenont Tower, Floor 2, 3, 8, 9, 30-34 Rama 4 Road, Klongton, Klongtoey, Bangkok 10110 Tel : 0 2204 3333, 0 2262 3333 Fax : 0 2204 1384 www.becworld.com