What does acquiring BIG FM mean for Music Broadcast Limited

Industry experts see the acquisition as a good move

BigFM

Reliance Broadcast Network Limited-operated FM radio networks brand BIG FM being acquired by Music Broadcast Limited (MBL) is one of the biggest consolidations the radio industry has seen in the last one year. Industry experts consider the development a good move.

According to Amit Doshi, Founder & CEO, IVM Podcast, this is a situation where the sum will be greater than the total of its parts. “As opposed to a digital platform, on radio, you can only do 24 hours of play a day. The acquisition allows MBL to expand the hours they can serve content. Consolidation has some interesting by-products-- it allows for economies of scale to develop. But it will also allow for added differentiation between the brands. Where frequencies are available so rarely, it will allow for interesting differentiation to be created,” he believes.

For Doshi, acquisitions like these make a lot of sense as there are limited number of radio frequencies available and it is a constrained resource in a growing market. So acquiring additional capacity comes in handy, he feels.

But will acquisitions like this be a trend in the industry? “I doubt it. This was a singular opportunity. The number of stations is so low in this country and they are mostly owned by large media houses. I don’t see them divesting from the business,” adds Doshi.

In terms of revenues, MBL will have a better position to negotiate with advertisers. “The consolidation will put the combined network in a position of strength, providing a wider landscape to advertisers. It will leverage content synergies of both brands, providing more opportunities to establish more retail and national client partnerships,” believes Rahul Satoskar, Head - National Pricing, Strategy and Exchange West, Mindshare.

The combined network will have 79 stations, making it the largest radio network in India. The entire transaction is expected to close in the first quarter of FY2021.

Subject to entering into definitive binding agreements, Radio City will initially acquire 24% equity stake of Radio Broadcast Network Limited (RBNL), the terms of which are being finalised by way of a preferential allotment for a total consideration of Rs 202 crore. Further, on receipt of all regulatory approvals, MBL will acquire the entire stake held by the promoters of RBNL basis an enterprise value of Rs 1050 crore after making adjustments for variations, if any, on the basis of audited accounts for the year ended March 31, 2019.

As for stocks, according to market analysts, investors have shown less interest in radio stocks because the companies have not seen full recovery in ad revenues after demonetization, GST and RERA.

A Motilal Oswal report on the trend says, “Given the moderation in revenue growth seen in the last two years, we have reduced our revenue estimates by 2-3%. Yet, the inherent operating leverage should ensure steady PAT CAGR of 28% over FY19-21 on revenue CAGR of 13%. This should be driven by higher utilization at new/legacy stations and steady yield improvement (at legacy stations).”

The report also says that nearly 30% of the RBNL acquisition is expected to be funded through internal accruals, while the combined cashflow after RBNL acquisition should allow RADIOCIT to repay the balance amount in about three years post the acquisition.

As for the valuation view of stocks, the report says, “Healthy earnings growth coupled with improving returns profile bodes well for the stock. But, we believe increasing risk from Digital warrants a discount to valuation. We ascribe 10x (40% discount to two-year average, since IPO) to FY21 EBITDA, arriving at a TP of INR70 (prior: INR76), yet offering healthy upside.”

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