During the past fiscal year, India found it increasingly difficult to tackle the conflicting demands of managing growth and price stability. The Indian economy grew by 6.9 per cent with the headline inflation remained persistently high and sticky at around 9 per cent. However, the Economic Survey 2011-12 predicts the outlook for growth and inflation as quite promising. It is estimated that the GDP growth will accelerate to 7.6 per cent and 8.6 per cent over the next two years, along with falling inflation and fiscal consolidation.
Against this tenuous economic backdrop, the Indian Media & Entertainment (M&E) stands out for its continued growth and bright future prospects when this industry is shrinking in most parts of the world. Growth headroom was provided by rising disposable incomes, strong consumption in tier 2 and 3 cities, under-penetration and the fast growing new media businesses.
Given the huge potential and immediate opportunity, we are seeing heightened deal making activity in the Indian M&E sector. The sector witnessed 42 transactions valued at USD 940 million in 2011 as compared to 27 transactions valued at USD 693 million in 2010. Specifically, we are witnessing two distinctive themes being played out: consolidation in the traditional media businesses; and significant PE interest in Digital and New Media businesses.
THEME 1: CONSOLIDATION IN TRADITIONAL MEDIA
India has one of the most fragmented landscapes in traditional media. It has 80,000+ newspapers, 600+ TV channels, 5000+ MSOs, 60,000+ LCOs and 12,000+ theatre screens. The result has been an overall underperformance in terms of profitability metrics that one would witness in mature countries, especially given the low cost of labour. Multiple factors are now at play that will eventually lead to a consolidation within the M&E industry, especially within the TV distribution and print segments.
There are approx. 15 large MSOs and DTH players in India as compared to 4-5 players in Western markets. Global experience shows that digitisation has been a big driver for consolidation in most developed markets. Given the added threat of DTH, digitisation will drive consolidation at an accelerated pace in India and subsequently, lead to the emergence of a few large, well-capitalised players over the next 5-7 years. We are already witnessing early signs of such a consolidation. Den Networks and Digicable, two of the largest MSOs are rumored to be in talks for a merger. Last year, Zee and Star came together for joint distribution of their channels.
In TV broadcasting, regional language channels have rapidly gained importance amongst media buyers and advertisers due to its inherent advantages over mainstream channels. National players have also realised the importance of regional channels in their bouquets and are actively looking at acquisition opportunities. TV 18’s acquisition of the Eenadu Group further demonstrated this trend.
In the traditional print segment as well, national players are looking to expand beyond their territories or languages. A large Indian print major is hoping to acquire Nai Dunia, a strong brand in Central India. Asianet acquired a majority stake in Kannada Prabha Publications, a Bangalore-based newspaper and Dainik Bhaskar acquired Divya Prabhat Publications, an Indore-based afternoon newspaper.
Traditional media has attracted few Private Equity deals over the last few years and this trend will continue except where large investments are provided to industry vertical leaders to drive consolidation or green-field expansion into the regional segment. This is quite different from the PE activity we are seeing in the digital space, which looks as if it is fast reaching its inflection point.
THEME 2: PE FUNDING IN NEW MEDIA
The Internet story in India has been late in gaining momentum given access issues. However, today it has reached an inflection point and we see India at the cusp of an explosion in Internet access and usage over the next five years – akin to the adoption of mobile handsets witnessed in the telecom industry.
Our estimates are that Etail market will shoot up 20x by 2016 to USD 12 bn. Internet advertising spends and Online classifieds markets will surge 3x to USD 800 mn and USD 700 mn respectively. Key growth enablers for online businesses, content, access and payment solutions are falling in place. PE investments which have generally made few investments in media over the last few years are flocking to the internet bandwagon. There has been about $ 450 mn worth of investments in Internet companies by VC and PE firms’ in 2011 at premium valuations especially for potential vertical leaders.
Indian M&E sector is poised for a period of sustained growth over the next few years as a result of the double lift it is witnessing − favorably impacted by a high GDP growth rate as well as the increasing ratio of Ad spends to GDP ratio to levels sustained in global markets. We will see a lot of deal opportunities from strategic investors in traditional media businesses and financial investors in new media businesses in the coming years.
Ashish Tripathi, Associate Director – Transactions Advisory, Ernst & Young