By Anushi Agrawal and Devi Leena Bose
This essay emerged from documentation of ownership structures of one Cable company (DEN Networks Limited) and the factors that give rise to these structures and their possible implications. The documentation is part of a larger study on the patterns and dynamics of ownership in the TV Distribution business, within the project “Tracking Access under Digitalisation“. The first post in the series of similar documentation can be found here and the second here.
In 2007, Sameer Manchanda, a Chartered Accountant by profession and a well-known media professional, faced a huge problem. He wanted to enter the cable distribution segment, but he was one of the last entrants in a field which was hugely fragmented and yet had large national and regional MSOs, which had sizeable market share. Manchanda wasn’t interested in being a fringe player, or an also-ran; he wanted to own the largest cable distribution company. So, he decided to chalk out an innovative and unique 3-C strategy to consolidate, corporatize and cartelize. In the process, he created the country’s largest cable empire, both in terms of volume and value.
By 2007, there were 120 million TV households, of which 71 million had access to cable. In value terms, the size of cable distribution was Rs 136 billion, or 60% of the TV sector. Viewers could access 220 cable and satellite channels in various languages. As per the Ministry of Information & Broadcasting (MIB), cable distribution remained extremely fragmented with over 6,000 MSOs (Multi-System Operators) and 54,000 LCOs (Local Cable Operators). Sources felt that the figures was twice the MIB one. Contrary to this trend, several pan-India MSOs, like SITI Cable, Hathway Cable & Datacom, and IndusInd Media & Communications, had sizeable market shares. Alternative technologies, like DTH (Direct-to-Home) competed with cable, and the government wanted the cable operators to shift from analog to digital technology.
When the Den Networks Limited entered the cable segment, it logically faced several last-mover disadvantages, which impacted its ownership structure, and also the manner in which it expanded and grew. However, the Group managed to overcome these challenges. For, in less than six years, by early 2013, it serviced 11 million cable households, including over 4 million digital homes, and was present in over 200 cities in 13 states. In 2012-13, the Group’s revenue stood at over Rs 9.34 billion, and profit after tax at Rs 623 million. It had, almost magically, emerged as the largest MSO in India, ahead of rivals like SITI Cable and Hathway Cable.
So, how did the Den Group do it? One of the clues lies in its ownership structure. The matrix, as on March 31, 2013, comprised 136 entities. These included the parent, Den Networks Ltd (DNL), seven 100% subsidiaries, eight subsidiaries in which DNL had holdings between 52% and 99%, 90 subsidiaries where the parent owned 51% each, 27 step-down subsidiaries, which were subsidiaries of nine subsidiaries, two joint ventures, and one company under “significant influence”. Why would a Group, which was present in only one segment, cable, have an ownership structure that looked more like that of a conglomerate? Why have hundreds of subsidiaries and step-downs, rather than merge them into the parent?
The answer to the first question lies in the fact that the only option for the Den Group to grow and expand rapidly was to quickly acquire many of the thousands of local MSOs and tens of thousands of LCOs. The reason: despite the consolidation by the national MSOs, like SITI Cable and Hathway Cable, the segment was still fragmented. It is for this reason that from the beginning, the Den Group pursued an inorganic growth strategy, through mergers, acquisitions and takeovers to gain a pan-India presence. As per its draft prospectus (August 2009), DNL acquired majority stakes in 62 MSOs in the first two years. By March 31, 2013, as per DNL’s annual report, the Group had more than doubled its acquisitions. In terms of market share, with 13 million subscriber base the Group had an almost 13% share across the country in 2014.
Logically, one can ask that why didn’t DNL merge these entities and, instead, opted to manage them as subsidiaries and step-downs? The reason: most of the sellers of the MSOs and LCOs decided to retain a sizeable, though minority, stake in their companies. So, while they sold, for example, 51% to DNL, they retained the remaining 49%. This was because they saw a future potential in the cable business, and wished to benefit from a possible increase in valuation of their holdings in a few years. Or possibly, DNL wanted them as minority shareholders since the original owners understood the local environment and markets.
However, this ‘conglomerate’ kind of a structure led to other problems. One of them was a question of control, i.e. how does one manage a loose group like this. In the agreements that DNL signed with the original owners, it included several crucial clauses to retain complete control, and implement uniform policies across the subsidiaries. Thus, in all the subsidiaries, DNL or one of its Group entity, had majority stakes, and they appointed the majority of the directors on the boards of the entities. In addition, none of the minority shareholders, or their family members and relatives could engage in similar or competitive business; if they wished to sell their stakes in the cable business, DNL had the first right of refusal.
Many of the above clauses also addressed the issue of conviction, i.e. to convince potential institutional and retail investors that the Group was indeed tightly-knit, and was unlikely to fall apart. This proved crucial when DNL went in for an IPO (Initial Public Offering) in 2009, and also raised loans in order to expand, acquire cable companies, and pursue a digital strategy when the government made it mandatory within a specified timeframe. This led to a corporatization strategy, i.e. to acquire a corporate structure despite the 136 entities.
By 2007, most of the larger MSOs incorporated the yet another C – ‘Collusion’ and/or ‘Cartelization’ – into their overall strategies. Standalone cable firms inked deals with broadcasters to aggregate content to put pressure on other MSOs and broadcasters. MSOs also signed deals among themselves to improve their clout over the broadcasters, and protect their subscribers’ base in regional and state markets. Obviously, the Den Group also pursued collusion and cartelization in the following manner:
- At the inception stage, DNL’s promoter, Manchanda, invited Raghav Bahl, who owned a bouquet of news channels, to become a non-executive director in the parent company. Through RRB Investments Pvt Ltd, Bahl owned almost 10 million shares before the 2009 IPO. The duo was also interested in certain broadcasters/distributors with whom DNL had inked “carriage fee” agreements.
- In January 2008, DNL entered into a 50:50 JV with the Star Group. The JV, Star Den Media Services Pvt Ltd was a content aggregator. It entered into agreements to place channels on preferred bandwidth with the distributors in India, Bhutan and Nepal.
- In 2011, Star Den Media Services formed a 50:50 JV with Zee Turner, which, in turn, was a JV between the Zee and Turner Groups. In effect, DNL had a 25% stake – 50% of 50% — in the new JV, MediaPro Enterprise India Pvt Ltd. The fact that such strategies were collusive was proved in 2014, when MediaPro Enterprise had to shut shop after TRAI disallowed content aggregation deals between broadcasters.
Hence, the time of entry of the Den Group influenced the ownership structure, and forced the Group to evolve a complex maze. Since it had inherent last-mover disadvantages, as well as advantages, DNL had to follow an acquisitions-led strategy; DNL devised several internal mechanisms to exert and retain control in the subsidiaries; and adopted 3Cs strategy to expand and leapfrog. Therefore, a study of media ownership can indicate a group’s growth strategy, management’s decision-making tactics, as well as its ability to compete with other players.