Are private treaties here to stay?

By Prajjal Saha , afaqs!, New Delhi | In Media | January 28, 2009
Media companies are trading their inventory for equity in both big and small companies. afaqs! takes a look at how large media-for-equity is likely to get

Action Construction Equipment Ltd (ACE) is a Faridabad based company, which manufactures the mobile cranes used in construction. In its decade-long existence, the company has never really had a budget for advertising. Like most B2B companies, it never felt the need for advertising its ware. Business expansion was already taking place by winning competitive bids and tenders. Other possibilities were not in the frame of necessities.

In recent years, though, ACE has been advertising itself aggressively. Is this because of a change in its marketing approach or a change in its equity structure? Or is it both? The truth lies somewhere in between.


is one of more than 200 - often little-known - companies that have taken to advertising in the last three to four years thanks to a most unusual initiative by India's largest media company, Bennett, Coleman & Co. Ltd (BCCL). Begun about three years ago, the initiative, which is called Times Private Treaties (TPT), has been gathering ever greater momentum.

TPT tries to identify and tempt promising advertising-shy companies to take media space in BCCL publications and media platforms in return for equity in those firms. BCCL believes that the Indian market is commodity rather than brand driven, which explains why only around 14,000 brands are actively advertised here as compared to about eight lakh in the US, for example.

The media company's broader objective is to increase the advertising pie by drawing in companies which have chosen to stay away from mass media for one reason or the other.

Some of these companies would possibly have turned to advertising in a few years, after they reached a certain size. The TPT initiative accelerates the process by convincing the entrepreneurs that advertising would hasten their growth. Considering the spate of deals that TPT has signed, it apparently has.

However, TPT won't comment on the value of its investments, which have been variously estimated at between Rs 1,800 crore and Rs 3,000 crore (though some suspect that it is lower than this investment band).

The ambiguity of the figure notwithstanding, it is certainly a huge sum of money that is under consideration, especially by the standards of the fragmented Indian media business, in which only a few companies have true financial scale. The list of investee companies includes big, mid-sized and small entities. At one end, one would find companies such as Kabirdas Motor Co. and Raja Rani Travels, while on the other, one would see a handful of giants such as Pantaloon Retail and General Motors Corp.

Even more interestingly, other media companies have been adequately intrigued by the TPT initiative to dip their toes into the media-for-equity business. HT Media, NDTV, Dainik Bhaskar, Dainik Jagran and Mid-Day have all launched their own private treaties division, though with differing degrees of seriousness. Many of them have signed a few deals, but perhaps not much more than that. For instance, NDTV has signed a deal to invest about Rs 25 crore of media in the infrastructure company, EMAAR MGF. Mid-Day, too, has clinched a deal with a software company.

However, barring one, none of the other companies was forthcoming, possibly because it is still early days.

Fund of inventory
What has brought the media-for-equity business into sharper focus is a recent attempt to get publishers together on this via the Rs 900 crore Morpheus Media Fund (MMF). The MMF is being promoted in partnership with Ozone Capital Advisors (o3 Capital). Media agency Maxus is the media advisor.

Deal After Deal
(Some of BCCL's investments)
No of Deals
Prominent Companies
Real Estate
Emaar MGF
Apollo Health and Lifestyle, Wockhardt Hospitals
Archies Ltd, Provogue (India), Khadim India, Welspun Retail, Pantaloon Retail, Piramyd Retail
Gurukul Online Learning Solutions, Hero Mindmine Institute
India Infoline Ltd
Consumer Durables
Videocon Industries, Zicom Electronic Security Systems, Birla Power Solution, Hanung Toys (India)
Today's Writing Products
Ezeego1, Travelguru, Kuoni Travel India Pvt Ltd
LVMH Watch & Jewellery, Gitanjali Group
Percept Picture Company, Sahara One Media & Entertainment, Pyramid Saimira
General Motors, Hindustan Motors
Gems & Jewellery
Kingfisher Red, Paramount
Mahindra Holidays & Resorts
Human Resource
Osian Connoisseurs of Art

The MMF intends to procure inventory from leading media owners across the country and buy equity in mid-sized companies across sectors that need advertising for growth. The media inventories will be provided to these mid-sized companies and, in return, media companies will get units in the MMF in proportion to the inventory utilised. The MMF wants to help the creation and growth of new Indian brands in the consumption sectors - primarily FMCG, but also consumer services, including education, health care, telecom and financial services. The MMF expects to make about three dozen investments, with a couple of them at about Rs 90 crore each and about half of the total at under Rs 10 crore.

The Morpheus Media Fund aims to garner 48 per cent of its media inventory from print companies, 38 per cent from television, 10 per cent from outdoor media owners, and 4 per cent from radio players.

When a person invests in the stock market, he has two options. He can either take the direct route and buy stakes in different companies himself or decide on a mutual fund, which offers a number of advantages such as diversification, professional management, cost-efficiency and liquidity. The MMF is like any other fund and comes with the risks and advantages that are attached to any mutual fund on offer.

Are we looking at a passing financial fashion? Or, with some of India's largest media companies exploring the media-for-equity business, are we witnessing the beginning of something truly significant? Suppose the MMF does find takers, could there be other funds - bigger funds - that will mop up significant chunks of available inventory?

Like the airline business with its empty seats, the media business worries perennially about liquidating excess media inventory. Firms have tried to create media exchanges as well as platforms to get rid of last-minute inventory. While the idea seems desirable in principle, publishers are reluctant to be associated with anything which even suggests discounting, or which would compromise their brand with clients in the long run.

Some publishers have used media barter, either with another publisher, or to acquire the odd asset. The approach has been opportunistic, not strategic. Is equity in return for media the answer that the business has been looking for all these years?

There are no lessons from abroad because, peculiarly, India is the only market in the world where media-equity swaps are being practised. TPT thinks that's because in the West, there is a plethora of opportunities and avenues to fund various activities, including brand building. The Indian market, on the other hand, is relatively nascent.

Executives familiar with the business emphasise that the publisher who harbours a short-term objective of merely cashing in on excess inventory in return for shares is bound to come to grief. For it to work, the play has to be long term. It may also be more complicated - and expensive - than it first appears.

One of the perils of playing long term is evident even in TPT's own portfolio of companies. The bulk of the investments were made in 2007 and 2008, during which the BSE stock index climbed steadily from 14,000 points to 23,000 points - only to settle later at around 10,000 points.

What's happened to companies worldwide will hold true for the TPT investments, too - they will be valued far lower now than at the time of entry. BCCL will presumably ride it out because of its size and sheer pile of cash, but any other media company would have been reduced to making a desperate exit for its investments.

Even when the markets are stable, there is the question of working capital. The media business is geared around receiving payment within 60-90 days. How much inventory can a company commit when it knows that the payback - assuming things go well - will happen only in three to five years? TPT concedes that it is a working capital intensive business in which the money is blocked for a long period of time "since realisation is contingent on the liquidity event of the underlying investment" - in other words, an exit.

While there is an unstated notion that media inventory is free, when committed on a sustained basis, it costs money. Listed media companies tend to have an operational profit of about 20 per cent. This relatively low margin, coupled with cash-flow requirements, means that a media company can't put aside a lot of inventory for equity swap deals.

Senior executives and analysts think that even a determined media company could not set aside more than 5 per cent of its ad revenue towards equity. Going by that broad logic, the most that media companies could invest in, say, 2009, in equity through inventory would be about Rs 1,250 crore (assuming advertising spends at about Rs 25,000 crore, going by media agency GroupM's estimates). And mind you, this is only potential - it assumes that every single publisher would want to get into it. Naturally, the real sum would be much smaller.

The other aspect publishers tend to overlook is that the investee companies have to be given media as agreed upon, according to that company's need - not just in the lean advertising season, when it suits the publisher. In fact, it is more than likely that most companies will want ad space when cash-paying advertisers want space, so the creation of the inventory will cost real money.

Because BCCL is not publicly listed, it has the freedom to invest in smaller, less known ventures and it can also take a greater degree of risk. A listed company such as NDTV, on the other hand, limits itself to investing in well established and profitable companies because it wouldn't like a notional loss reflected on its balance sheet.

In any case, finding small companies with high-growth possibilities isn't easy. TPT has more than a hundred employees scouring the market for potential investments. In the absence of a full-fledged team, says an investment banker, it would be difficult for a media company to identify lesser known players in low-profile businesses.

The flip side
Finally, there is the issue of how target companies might perceive an offer such as this from a media company. A top TPT executive says that while banks and financial institutions are happy to fund physical, tangible assets, the funding of intangibles has always been a challenge.

The advantage to an entrepreneur, he says, is that "he is using the future balance sheet to fund today's advertising need". While most entrepreneurs would rather have cash, there are few avenues to raise this, especially if they are in traditional businesses. Going by the TPT experience, they are clearly happy to accept the opportunity.

Would a Morpheus have the same acceptability factor? It is early days yet, but the scheduling of ads across media, as the fund proposes to do, involving a large number of companies, could prove to be a complicated business. Each media company has its own bundle of processes. Therefore, ensuring that a few dozen investee companies can avail of the media in the best possible way could prove quite challenging.

A media fund is a truly original concept and while publishers are intrigued because it gives them a relatively risk-free way of exploring the media-for-equity business, they also have concerns. One prominent publisher, for example, wanted an assurance that the MMF wouldn't target his cash paying advertisers.

That, indeed, is one major issue that makes publishers frown: Could this new initiative persuade cash paying advertisers to try equity instead? How does BCCL deal with this conflict, which surely exists? TPT argues that the two options between them "aid the overall expansion of the advertising pie rather than cannibalising it". The choice made from among the two avenues depends on the "business compulsions and growth drivers". The BCCL ad sales team may not share that view.

The other point of conflict is editorial. BCCL has been repeatedly attacked in the media for compromising its editorial independence in favour of private treaty clients - favouring them in print without revealing to its readers that it holds a stake. While the company denies that this is the case, there is no doubt that its editorial reputation has taken a hammering.

The media business routinely deals with the issue of editorial independence vis--vis the advertiser - it is in the nature of the beast. So, it is not clear why the media-for-equity business should lead to any greater conflict than what already exists by accepting advertising.

In fact, the MMF presentation categorically states that editorial support is not expected; advertising support is good enough. So, one can only surmise that BCCL mishandled the issue - either by going out of its way to favour TPT clients or by not dealing with the matter transparently enough. In fact, the TPT executive refused to address the issue when it was raised by afaqs!

The issue of conflict - either with editorial or with sales - does not change the fact that the media-for-equity idea is full of possibilities. However, like all new concepts, it may prove to be an expensive one to develop.

(The article has been written based on interviews with dozens of industry professionals, who include S Sivakumar, principal secretary and chief executive officer-designate, Times Private Treaties; Lynn De Souza, director, Lintas Media Group; Manajit Ghoshal, chief executive officer, Mid-Day Multimedia; Salil Pitale, head, media and telecom, Enam Securities; and Balu Nayar, managing director, Morpheus Capital Advisors.)

With inputs from Sapna Nair.

© 2009 afaqs!