FM players in Catch-22 situation with Phase III 3 year lock-in period
The 3-year lock-in period prescribed under the FM Phase III policy could adversely affect M&A in radio sector
The 3-year lock-in period as prescribed under the FM Phase III policy might have an adverse effect on acquisitions in the space say industry insiders we spoke with.
One of the major points raised by some operators during the pre-bid consultations has been what happens in case of sale of business by an operator. In answer to queries by operators, the Ministry of Information and Broadcasting (MIB) stated that there would be no change in the lock-in period for either the new owner or the old owner. What this means is that the majority stake holder is not allowed to change the ownership pattern of the company through transfer of shares within the 3-year period. This has caused some consternation among operators as many seem to be unsure about how it will affect acquisitions.
The situation becomes murkier in case of multiple frequencies. Take the example of Radio Mirchi, which announced last week that it is looking to buy Oye FM, subject to government approvals. Both the stations have licenses for Mumbai and Delhi. If the deal goes through before the Phase III auctions, they will be in violation of Phase II laws which do not allow a single entity to hold multiple frequencies in the same city. Post Phase III auctions, when this is allowed, the lock-in period comes into effect. Does this mean that a change of ownership will not be possible for a period of three years? How does the MIB aim to resolve such a scenario? This seems to be the question facing operators.
One operator queried the MIB whether the seller can be allowed to sign GOPA (Grant of Permission Agreement) without the lock-in subscription and subsequent to receipt of approvals for the transaction, the purchaser could sign the GOPA again; this time with the lock-in period in place for the new permission holder. The MIB , in its response posted on Tuesday, stated that all formalities for migration including clearance of Government, BECIL dues and exercise of options by existing permission holders shall have to be completed before March 7, 2015.
One radio executive agreed that the situation was not completely clear and further discussions and study would be required before finding a solution.
In response to a similar question by another operator, MIB stated, “There will be no waiver in lock-in condition of 3 years, either for new owner or old owner. The company holding permission as on March 31, 2015 will sign the migration GOPA.”
A radio executive with a national level radio operator, who admitted that the company had put on hold acquisition plans because of the lack of clarity around this, said, “We decided against it (acquisitions) at that point since we felt that it was a bit risky. Given how things stand, we felt that putting money in bidding for spectrum would make sense.”
However, another source who was involved in a recent acquisition deal stated that this particular rule will not have any real effect on any deals. “They just want to keep the serious people for the bids and keep out the riff-raff who would sell out after a year,” said the source. Both requested to not be named.
It is easy to understand why the MIB is insisting on this rule. It wants all the players to participate in the bidding process. Otherwise it would be easy for a station to acquire another operator with existing licenses and just pay for the migration fee. It is important to note here that the auction cost is expected to be more than the license renewal fee. So the exchequer does stand to lose out on money if stations go down the acquisition path.
“The three year lock-in is a big dampener. It should have been removed for the existing players who have already served a 5 year lock-in under Phase II. We are not sure how M&A deals will go through with this lock-in, especially for people looking at multiple frequencies. It will definitely make acquisitions less feasible for operators,” said Nisha Narayanan, COO of RED FM.
Another high-profile acquisition done recently was when Dainik Jagran bought Radio City back in December.
We tried reaching out to Radio City representatives to get their views but they declined to comment.
This is of course, not the only issue facing radio operators. The MIB has stated that they will not get involved in the ongoing dispute between BECIL and operators regarding outstanding dues. Since, the MIB wants all dues to be cleared before signing of GOPA, this has put operators in a bit of a spot. Requests to ask BECIL for a NOC to let operators participate in auctions have been denied.
“While responses on most issues were expected, the timeline to deal with the so called BECIL outstandings, which are subjudice is very short. MIB should allow NOC without these disputed settlements or allow players to deposit money as a protest in court,” said Vineet Singh Hukmani, MD of Radio One. Narayanan also agreed that paying under protest could work for some players. She expressed disappointment that MIB had decided to not intervene but said that they were confident that the auctions will not be held up due to this and everyone will be able to get their NOC from various departments.
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