What we thought of Star India valuation was all wrong. Well, mostly

On 28 February, Reliance, its step-down subsidiary Viacom18 Media and Disney agreed to combine the businesses of Viacom18 and Star India, valuing them at $3.9 billion and $3.12 billion respectively. Multiple media reports and pundits pointed out that Disney had taken a steep haircut, as Star India, when Disney bought it from Rupert Murdoch in 2019 as part of a $71 billion global deal for 21st Century Fox, was valued much higher — at $12-15 billion.

However, the deal with Murdoch in December 2017 had valued Hotstar at just $6 billion, the documents showed, while Murdoch’s 30% stake in Tata Play (then Tata Sky) was valued at another $800 million. By the time the deal concluded in 2019, the Indian rupee had weakened and the value ascribed to Star India fell to $5 billion, while that of Tata Play was at $600 million.

In the Reliance-Disney JV, Star India is valued at $3.12 billion, while Tata Play’s equity is capped at $300 million. Disney is expecting $500 million in licence fees from the JV over the next five years and has ascribed the value of the stake at $3.9 billion. Factoring in the weaker rupee, Disney’s India assets’ value would be just around $4.5 billion today, on a status quo basis, the documents show.

A Disney Star spokesperson declined to comment on Mint’s detailed query on the valuation details.

The documents, sourced from investment bankers and legal firms show that Disney did settle for a lower valuation, but nowhere as steep as widely reported, thanks to expected losses in the sports sector and intensified competition from Reliance.

As per the deal, Reliance will effectively control the JV. It will have a direct stake of 16.34% in the company, while Viacom18 will have 46.82%. Disney will own 36.84% of the JV. Initially, Disney was to own a bigger stake; however, after the other major media merger between Sony Pictures Networks India and Zee Entertainment Enterprises collapsed, the latter reneged on its obligations under the sublicence of the ICC TV rights, worth $1.4 billion.

“Disney had to agree to reduce its ownership to 39.3% and subsequently to 36.84%. This was to avoid an indemnity as the valuation adjustment equated to 25% of the gross amount of the sublicence,” said an investment banker.

He added that the narrative surrounding Disney’s Star India may not be as rosy as initially portrayed.

“The Disney-Fox deal valued Star India at a modest $5.8 billion, significantly lower than previously speculated figures. If you factor in the depreciation of the Indian rupee against the US dollar, the current valuation of Star India stands at a mere $4.5 billion, raising questions about the true extent of Disney’s investment in the Indian market,” he said.

The documents show Disney estimating that the Indian JV will generate approximately $1 billion of net present value to the company above Star India’s status quo plan, and with the long-term licensing deal for Disney content (worth approximately $500 million), it will represent a total value to Disney of $4.9 billion, against the 21st Century Fox acquisition valuation of $5.6 billion at current exchange rates.

The fall in value was due to the decline in the value of Tata Play and half by the Zee sublicence adjustment. In addition, the weakening of the rupee has driven a further $1.2 billion in dollar-denominated decline. All NPV values exclude potential cash tax consequences of the transaction which is estimated to be up to $300 million.

The deal will result in the deconsolidation of Star India’s business from Disney’s financial statements. The separation of Star India from the company’s linear entertainment assets will require the allocation of goodwill to Star and result in an estimated $1.25-1.75 billion accounting impairment, which includes synergies but excludes the value of the licensing agreement, the documents suggest.

To be sure, Star India remains the king of India’s media and entertainment sectors, including linear entertainment (32% share), sports (70% share), and SVOD services (33 million paid subscribers). Its linear entertainment business generates $500 million profit year on year. However, its sports and streaming businesses have been more volatile and loss-making.

Incidentally, the documents also show that Disney was aiming to achieve break-even in the sports and streaming businesses by FY25, paving the way for overall business profitability. However, aggressive initiatives by Reliance Jio, which boasts over 450 million wireless subscribers, expanding into the media and entertainment sector, posed some serious risks to its plans. Disney was of the view that Jio’s rollout of fixed wireless to the home, featuring video services, in 2025 could prompt a significant shift from Pay TV to fixed wireless, posing distribution challenges.

“Star’s strategy heavily relied on substantial growth in digital advertising revenue from Hotstar’s AVOD business, amidst fierce competition from Reliance’s JioCinema, which has been actively acquiring sports and entertainment content rights, which made it unsure of its plans,” the banker added.

A senior lawyer added that Disney is also mindful of the fact that despite the disruption, India remains the strongest international growth market of scale for the company, especially given China’s limited accessibility to US media and entertainment companies.

It is important to note that Disney had agreed on a non-binding term sheet in December last year to create a strategically positioned entity, align its interests with Reliance’s, and de-risk the company’s future operating performance in India.

The proposed JV is subject to certain standard closing conditions including regulatory review and approval. The two parties have negotiated a nine-month long-stop date, but Reliance believes it may be able to expedite the time frame.

Will the deal get the CCI’s approval?

Industry pundits point out that Star India has genre-leading channels in Hindi, Marathi, Malayalam, Bengali and Kannada markets. With the merger, the two companies’ combined market share will cross 40% and some markets will see complete dominance and a lack of competition. The Competition Commission of India (CCI) may take a close look at this aspect.

However, both Reliance and Disney are hopeful of getting CCI’s approval, given that the competition watchdog had given its conditional approval for the Zee and Sony merger — after directing the former to divest some channels.

“There is a precedent with the Zee-Sony approval. Yes, there are a few markets where the combined entity will have dominance, but there is enough competition in the market. The two companies will have to be ready to divest some assets if needed, and give some undertakings, wherein they may have to agree to not increase channel prices etc for a stipulated time,” said a person with knowledge of the deal terms.