Videocon debt derails Dish TV mega merger – is it temporary?

While the industry half expected India to whip up some legislation to block the country’s two largest satellite TV operators merging to create a pay TV monopoly, it recently came to light that another factor has caused the merger to stall, after Dish TV uncovered some serious financial problems inside the Videocon d2h operation.

We feel this is likely to be a minor roadblock on the way to completing a deal, yet it raises two serious questions – how Videocon d2h managed to conceal its debt mountain from Dish TV for so long, and what would be the ramifications if Dish TV made the unlikely decision to scrap the deal altogether or drop the price offered dramatically?

In a tumultuous market where MNO Reliance Jio is disrupting all things video, mobile, data and broadband, a refusal from Dish TV to form what would be a pay TV behemoth boasting 29 million homes, more than 41% of the Indian pay TV market, would be a suicidal move. Yet this is not an outcome worth eliminating entirely, as failure to agree on a revised price could still collapse the deal should neither party concede ground.

After belatedly discovering that Videocon d2h’s parent company, Videocon Group, has debt of $453 million, Dish TV revealed it is investigating insolvency proceedings against Videocon d2h initiated by the State Bank of India at the tail end of last week. In simple terms, Dish TV realized that Videocon d2h cannot pay its debts. Videocon d2h’s annual report ending March 2017 shows liabilities of $553.1 million, down from $602.4 million at the end of the previous financial year.

This is likely a case of rescheduling debt to further out in time once Videocon d2h has grown revenues, on the understanding that it will continue to add subscribers. The company added 130,000 pay TV customers in its second quarter and grew revenues slightly by $1.5 million. That is essentially the essence of the entire merger; not to tighten up defenses amid threat from competition, but rather to take up a significant market share and become a more profitable entity – projecting a combined 48% share by 2019. Dish TV will likely drive down the price to make this happen and Videocon d2h shareholders will eventually concede.

An improbable eventuality where the merger falls through, keeping the Indian market as a six-horse race in DTH rather than four, opens up an opportunity for the Reliance Jio juggernaut to make some headway in a market that is nowhere near saturated. Given that broadband infrastructure in the country is poor, acquiring satellite networks and the content clout to go with it has been part of Reliance Jio’s growing video ambitions – aiming to reach a share of consumers not yet viewing video on smartphones. Of course, Jio has its hybrid OTT satellite service which includes a suite of apps, including Jio Play, Jio Chat, Jio News and Jio Money etc, accessed via its 4G network.

Tata Sky, Airtel, Sun Direct and Reliance Digital TV make up the bulk of the DTH market outside of Dish TV and Videocon d2h, some of which have been driven to signing up to bring Netflix content to Indian consumers to compete with Jio.

Reliance Jio was expected to launch its own DTH service in September last year, but has come up against repeated delays for unknown reasons, with no new launch date set. The 432-channel offering could end up launching in tandem with Jio Fiber later this year, which in turn will disrupt India’s broadband market after Reliance Jio recently acquired RCOM’s broadband network.

The merger looked set to complete imminently after receiving its final seal of approval from the ministry of information and broadcasting (MIB) last month.

Dish TV has asked advisors to evaluate the company’s position regarding the merger, expecting to provide a report within the next two months. “In light of the foregoing, the Company is evaluating as to whether there is any impact on its rights and obligations under the definitive agreements, or consequential effects from the transactions contemplated,” Dish TV said in a filing to the BSE.