The much-awaited merger of Reliance’s media assets and Disney India business is finally happening. Yesterday Reliance Industries (RIL), Viacom 18 (a subsidiary of Reliance Industries) and the century-old US media behemoth Walt Disney announced the signing of a binding definitive agreement to merge the media assets of Viacom 18 and Disney’s Star India. The value of the merged entity (NewCo) has been pegged at $8.5 billion. Based on RIL’s direct and indirect ownership in Viacom 18, its effective stake in the NewCo is estimated to be 49-50 per cent.

Based on RIL’s current share price, this represents just ₹40-50 per share (or 1.5 per cent of value). Further, this value is, to a large extent, already reflected in its share price, given RIL’s existing ownership in Viacom 18. Bottomline: this transaction is insignificant for RIL.

Why the buzz?

The merger creates India’s leading media conglomerate. The combined portfolio of 120-plus channels span multiple genres (pan India)with viewership of over 750 million (broadcast and streaming). The combined might will give the merged entity leverage with advertisers across platforms (TV and digital/streaming) as well as in content negotiations with third parties. With a huge library of content and exclusive licence to distribute Disney films and productions within India, and access to the 30,000 content assets of Disney built over a century, it can also make its streaming services stickier for customers and also grow significantly over the long term.

This is said to favour RIL’s telecom business, given that the streaming services of the merged media entity will be bundled with it. Nevertheless, the impact may not be very significant as such bundling can be provided without owning media assets as well.

Hence while the deal may not be a game changer for RIL, given its size and scale, it’s a significant event for the Indian media industry and the ecosystem around it. A successful completion of the deal will chart a new path in the evolution of the Indian media industry.

Impact on listed subsidiaries

RIL’s listed media subsidiaries, Network18 Media and Investments and TV18 Broadcast, hit lower circuit of down 5 per cent on Thursday following the deal announcement. TV18 is in the process of being merged into Network 18. While Viacom 18 is presently a subsidiary of TV18, on a fully diluted basis (factoring compulsorily convertible preference shares held by RIL group entities and Bodhi Tree) its stake in Viacom18 will be around 13-14 per cent. This would translate into an around 6 per cent stake in NewCo.

Without adjusting for holding company discount, this will represent around 25 per cent of market cap of revamped Network 18. Note that these are approximate estimates based on current market cap of Network 18 and TV18, share-swap ratio and the elimination of Network 18’s current stake of over 50 per cent in TV18.

The negative reaction in the stock is perhaps due to the smaller indirect ownership in the NewCo, which implies the upside from the RIL-Disney deal may not be significant for Network 18 after adjusting for holding company discount.

This apart, for competitors like listed player Zee and unlisted media business of Sony in India, the NewCo with its larger scale will pose a challenge. Scale matters in the evolving media business and consolidation is key for growth and profitability in the long term.