Reliance Industries Ltd (RIL) (NSE: RELIANCE) and Walt Disney Co. (NYSE: DIS) are on the cusp of finalizing the largest merger in the history of the Indian entertainment industry. Authoritative sources involved in the negotiations reveal that both entities are meticulously working on a non-binding term sheet, laying the groundwork for the amalgamation of their respective media and entertainment operations in India. If successfully executed, this strategic alliance is poised to propel the Mukesh Ambani-led conglomerate into a position of unparalleled dominance, securing a controlling stake in the merged entity.
The strategic blueprint involves the creation of a step-down subsidiary under RIL’s Viacom18, absorbing Star India through a judiciously structured stock swap. Positioned as the primary architect of this enterprise, Reliance is actively seeking a controlling stake, aiming for a commanding 51% in the merged entity, while Disney is positioned to play a vital role with the remaining 49%. Both entities are equitably treated as comparable in scale, prompting RIL to unleash its financial prowess by likely paying in cash to secure the controlling interest.
In addition to their strategic manoeuvres, both parties are currently negotiating to formulate a plan for an immediate capital injection in the form of “cash,” ranging between $1-1.5 billion. This substantial financial infusion is poised to play a pivotal role in shaping the final shareholding structure of the merged entity. The overall valuation of the merged entity is intricately linked to the financial commitments made by each party.
Movers and Shakers in the Boardroom Drama
The forthcoming board of the merged entity of RIL and Disney is anticipated to maintain a balanced representation, with at least two directors each from Reliance and Disney. Uday Shankar-led Bodhi Tree, Viacom18’s second-largest shareholder with a 15.97% stake, is expected to secure a board seat.
The board composition also contemplates including a minimum of two independent directors, although this aspect may undergo modifications in the weeks ahead, according to insiders. Those involved in the negotiations from the Disney US company include Justin Warbrooke, CFO, direct-to-consumer business, and international head of business operations, and Kevin Mayer, a former Disney executive brought back in July by chief executive Bob Iger as an adviser to help him navigate the company’s legacy television business and the ESPN sports network. Another participant is K Madhavan, Disney’s India head, and The Raine Group, an advisory entity.
Manoj Modi, a key advisor to Mukesh Ambani, supported by the conglomerate’s M&A team, is taking the lead in negotiations for Reliance.
Highlighting the nature of the transaction, one source emphasized that it’s a merger, not an acquisition, with a distinctive shareholding structure. Rather than a straightforward purchase with cash, both sides are poised to contribute equity, ensuring that even the junior shareholder maintains specific rights in the merged entity. This innovative approach reflects a strategic balance in the ownership dynamics of the impending collaboration.
What’s on the Table?
The Walt Disney Company is anticipated to empower the merged entity with a five-year license for exclusive subscription video-on-demand (SVOD) content, covering Disney+ originals and its expansive library content. Alongside this, a five-year lock-in period is expected to be established, allowing for flexibility only in the case of an IPO for the merged company.
Both distribution channels and access to Jio Platforms will be made available to the joint venture under terms agreed upon by both parties. To safeguard a competitive advantage, a comprehensive list of competitors will be meticulously outlined, ensuring that any engagement with them is prohibited.
Upon signing the term sheet, a 45 to 60-day exclusivity period is likely to be initiated, with the potential for mutual extensions. This exclusivity window provides both entities a dedicated timeframe for focused negotiations and collaborative development of the proposed joint venture.
In November, Walt Disney CEO Iger mentioned during an earnings call that the company was actively exploring various options. He expressed the company’s interest in staying invested in India and aiming to “strengthen our hand, improve the bottom line.”
Disney’s Struggles in India’s OTT Market
Disney+ Hotstar, despite being India’s largest OTT platform, has been struggling to keep subscribers hooked. The number of Dinesy+ Hotstar paid subscribers reached an all-time low of 37.6 million during the fourth quarter of fiscal 2023, ending September 30, 2023. The OTT platform reported a 38.7% YoY decline in paid subscribers during the quarter. In terms of revenue, Disney+ Hotstar generated an average of $0.70 or Rs 58 per month from each paid subscriber during the same quarter.
In contrast, JioCinema reported a substantial 221 million monthly active users as of June 2023, though the information on how many of these are paid users is not provided. If the speculated Reliance Disney merger materializes, combining JioCinema and Disney+ Hotstar, the consolidated platform would have a significant user base of 258.6 million subscribers. This merger could lead to a new monopoly in the Indian video streaming landscape, presenting stiff competition to other major players such as Netflix, Amazon Prime Video, SonyLIV, Zee5, and others.
Walt Disney-owned Star India reported a 31% YoY decline in consolidated net profit, dropping to Rs 1,272 crore in FY23 from Rs 1,834 crore in FY22. The company’s operating revenue from the TV and digital businesses grew only 6% YoY to Rs 19,857 crore, and total income increased 9% YoY to Rs 20,699 crore during the year. Despite slow growth, Star India positions itself as India’s largest traditional media and entertainment company based on revenue.
Meanwhile, Novi Digital Entertainment, the subsidiary that owns Disney+ Hotstar, reported its net loss more than doubled to Rs 748 crore in FY23, while revenue rose 35% to Rs 4,341 crore. It is important to note that Novi is currently undergoing a merger with its parent company, Star, which holds a 78.07% stake in the subsidiary. These financial figures offer insights into the fiscal performance of Walt Disney’s entities within the Indian media and entertainment sector.
The Reliance-Disney merger presents both challenges as well as opportunities for the Indian video streaming market. While concerns about a monopoly are valid, it’s crucial to remember that the OTT landscape is constantly evolving. The future of Indian streaming will depend on a balance between fostering healthy competition, promoting diverse content, and protecting the interests of viewers.
