1. How would you describe the principal business of TV India?
2. Where is Mauritius and why does TV India need to have a company (TVM) based there?
3. A Why does this investment appeal to you? Give at least 3 compelling reasons, based on the Information Memorandum.
B. Why does this investment notappeal to you? Give at least 3 compelling reasons, based on the Information Memorandum.
4. Founding Investors
A. What contribution(s) is The Hindustan Times group likely to make to TV India?
B. What contribution(s) is Pearson likely to make to TV India?
C. What contribution(s) is Television Broadcasts likely to make to TV India?
5. Why are the Founding Investors looking for one or more new investors?
6. If your VC Fund were to make this investment, what are you likely exit (divestment) options? (Give at least 3 reasons.)
7. Identify the 3 most significant risks in the business of TV India and how you might mitigate or eliminate each one.
8. Based on the Information Memorandum and your experience, would you recommend to your Investment Committee to pursue this opportunity further? Why or why not?
The TV India Business Model
TV India had begun its journey on 6th March 1995 as an export company primarily involved in television software production. Apart from production, the company’s business included arrangements for licensing, attracting television advertisers for investment purposes and associated administrative activities. For the purpose of distribution, it had taken lease of Palapa C1 satellite. However, TV India had a visionary of launching the market and distribution activities in major urban areas before the satellite functions began. It planned to pursue this through extensive technical support and advice. TV India aimed to achieve these functions by building an efficient management team by means of first focussing on recruitment of around 150 employees who could competently take over the production, operation, marketing and financial functions and then delegating the responsibilities accordingly.
The collaboration with TVM, a television software company based in Mauritius, stood on an exclusive licensing agreement as per which TVM will be responsible for publicising the Home Television Channel to the advertisers. The broadcasting activities would be taking place from Hong Kong as it forms the most dominant and the largest broadcasting network of Chinese language television products across the world. The marketing role would mainly comprise of extending expertise to authorise the local transmission network through production activities and technical programming. In 1983, the governments of India and Mauritius entered into a Bilateral Treaty. The terms of this Treaty specifically implied that under no circumstance can Double Taxation be imposed upon the product or service of any joint venture by two or more international businesses. This was done to prevent fiscal evasion as well as maximise and improve the trade relations across countries. Since India held the benefit of this double tax treaty with Mauritius, the third party funds would be predominantly utilised in setting up a TV programming studio based in Mumbai (Bombay) which would be producing programmes in Hindi language. This programming studio owned by the same group would be delivering the Home Television Channel whose advertising slots would be marketed by Mauritius based TVM Limited.
There are various reasons that make TV India an appealing option. Out of these, three significant reasons include the following:
- The Television Programming industry has a fast growing advertising market making it a profitable investment option.With growing number of cable connections in households, the sector of cable television had rapid expansion.
- The Price/Earnings Ratio or PE Ratio is an important aspect to consider before any investment. It refers to the sum of money an investor would be willing to pay for each rupee worth of that earned by the company. In 1996 that accounted for the initial days of its stock market launch, Zee TV, which is a closer example to TV India, was able to incur an estimated price of INR 14 per share from INR 2 per share in 1993, indicating a 7-fold increment within a period of just 2 years. This provided an advantageous forecast for investment in TV India.
- The Home Television had planned its project implementation after having identified its target market that consisted of the relatively wealthier population of the northern and western regions of India. It comprised of 64% of the cable subscribers whose regional dialect was mostly Hindi (Chadha and Kavoori 2012).
Three significant reasons why potential investors would be less interested to entrust finances on this business are as follows:
- Investor’s vulnerability towards alternative high quality programming.
- Considering TV India to be in line with an industry like Zee TV, it was observed that although the industry had been able to incur a seven fold increment in its price estimate from 1993 to 1996, its valuation from 1995 to the current estimate is at 12 time the PE, which is rather low with regards to an established industry like Zee. Thus, this data providing forecast about future earnings made investment in a similar business like TV India, a less appealing option.
- The viewers could not be satisfied by keeping them engaged only in the conventional broadcasting system (Chander and Karnik 1976).It was a cumbersome process with a lot of risk involved to traverse on the digitalisation path to reap the benefits of technological up-gradation.
The HT Vision is one of India’s most popular privately owned independent production house of television software which is involved in broadcasting primarily the current affairs programmes on Television. HT Vision which came into being in 1990, was associated with Hindustan Times Group and had the sole monopoly in private television sector when not even Doordarshan networks had any private slots.
Three Significant Reasons to Invest in TV India
The data available on The Hindustan Time Limited shows that the organization has been performing considerably well and that the profit of the company has been increasing considerably. The pre-tax profit of the firm was around 24 Crores in 1990 and by the end of 1995 it became 84 Crores. This reflects a direct growth of approximately 60 Crores. In the same manner there has been a 100% increase in the income in the span of five years and the firm`s earning per share has increased 100% from a span of 1990 to the year 1993.
Pearson Communications Group is a leading international publishing house with extensive involvement in data communication and television. Popular names associated with this group include Penguin Books and The Financial Times. Pearson hold a share of 10% interest in Television Broadcasts and manages two important large scale international businesses: Thames Television and Grundy Worldwide.
The data on Pearson limited shows that although the company has grown considerably, the growth has been quite limited in nature and the firm has just grown to an extent of 50%. Moreover, the operating profit of the firm has also increased in an approximate rate of 80% in the span with the Earning per share of 25 pence in 1990 which increased to just a mere 34 for 1994.
Television Broadcast played a major role in the establishment of Indonesia’s newest commercial television station by means of providing expert aid in production and technical functions to set up the transmission network.
The TVB limited company has reflected a considerable growth in the past few years with the turnover an amount of 1505 million in 1990 to 2650 in 1994. Moreover, their earning per share has also increased to an extent of 100% from 1990 to 1995.
The Founding Investors: The Hindustan Times Group, Pearson and the Hong Kong Based Television Broadcast had combined their efforts to bring about a unique knowledge-based experience of watching Home TV. The quality of Home TV was a distinguishable from its competitors owing to the planned investment of the founding investors in innovative media projects across India and rest of Asia. The main reason why they were looking for new investors was to sustain this standard of the business in future. They had envisioned a market structure for future investment in television production that had the potential for high annual growth in the long term. For short-term profitability, they wanted the new investors to have the acumen to invest in such popular and successful channels that were less likely to lose market share. Along with that, the economic returns could be sustained through income from exported television software, increasing the advertisement time and frequency and embarking on new ventures like music, animation and tele-education (Chang 2003).
Three Reasons Why Investors May Not Want to Invest in TV India
Venture Capitalist Funds or VC Funds aim their investments to those new firms whose business model has the potential to create a niche market (Gupta 2006). However, at times, the investing firm decides to breach its association with the start up. Reasons for doing so are listed below:
- There are certain risks involved in investing in such start-ups, like sharp declining returns. Often these new ventures face loses and increased competition from the established firms which causes to hamper its initiatives. These risks lead the investing firms to discontinue their allegiance with the start-ups maintaining all contractual obligations.
- The exit options might include a divestment in terms of finances and merging with the research and development of the new firm.
- The investing firm might also go for acquisition of the start-up by buying a significant number of its shares floating on stock market.
The best way for a business to sustain its growth in a competitive market which is undergoing rapid technological up-gradation, is by identifying its drawbacks posing threat to its continuance and taking appropriate measures to overcome those risks (McMillin 2002). Three instances of such risks for TV India and its consequent mitigation strategies are as follows:
Risk 1: The audience is always in lookout for new form of entertainment. As a result, the channels have to keep innovative and mature strategies up its sleeves to cater to this needs. It is a meticulous process that requires wholesome attention in each of the separate segments in order to address the complete domain (Manchanda 1998).
Mitigation: Although the business process involves a few difficult undertakings, it can be managed by strategic planning like conducting market surveys on viewer’s choice and segmenting the surveys based on language, genres and dialects (McDowell 1997).
Risk 2: The TV advertising companies are facing increased amount of challenges in terms of airing their commercial products as most viewers have a natural tendency to avert the commercial breaks (McDowell 1997). As a result, even in such difficult circumstances when the price position keeps falling, the TV advertising sales people are compelled to boost their inventories.
Mitigation: The real and perceived risks need to be evaluated in this context and advertisement companies need to engage in innovative promotional strategies and ad campaigns (Manchanda 1998).
Risk 3: The business culture of India itself is the biggest threat to any new entrant irrespective of the industry. Since India is a land of diversity, evaluating consumer preference and stakeholder’s interest is a risky affair. It is subjected to frequent changes, serious surprises leading to major setbacks (Kothari 2000).
Mitigation: It takes considerable amount of time to create a sustainable market in India. With adequate patience, new entrants in the television broadcasting industry like TV India would be able to gather proper knowledge and collect resources accordingly and thus it would be able to proceed towards a sustainable growth (Manchanda 1998).
The Founding Investors of TV India had initiated this project with the vision to propagate it among every household across the country. They wanted to fulfil this purpose by combining experience and expertise and provide credibility through adequate capitalisation. To take this vision forward, the Investment Committee is approached with a framework of how this television production and export company can be developed with higher financial contribution. Indian television is regarded as the most favourite media among the masses. With initial investment by foreign firms, even the English entertainment programmes have gathered equal popularity along with fictional and non-fictional daily soap, kid’s entertainment programmes and news channels (Kumar 2010). The highest revenue earners are the sports channels. Thus with active financial effort on behalf of the Investment Committee, TV India can make a recognisable mark in the broadcasting industry.
As seen from the case, the founding investors consist of three of the most established and flourishing business like Hindustan Times, Pearson and Television Broadcast. Their financial data have revealed that:
- Hindustan Times pretax profit was around 24 crores in 1990 and by the end of 1995 it became 84 crores. This reflects a direct growth of approximately 60 crores. In the same manner there has been a 100% increase in the income in the span of five years and the firm`s earning per share has increased 100% from a span of 1990 to the year 1993.
- Pearson Group’s operating profit has also increased in an approximate rate of 80% in the span with the Earning per share of 25 pence in 1990 which increased to just a mere 34 for 1994
- The TVB limited company has reflected a considerable growth in the past few years with the turnover an amount of 1505 million in 1990 to 2650 in 1994.
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