49417192 M a Grp10 Reliance AdLabs Final Report V2 1

7/29/2019 49417192 M a Grp10 Reliance AdLabs Final Report V2 1

1/17

M&A Project Study

Reliance Adlabs AcquisitionReliance Adlabs Acquisition

Prepared By :- Group 10

WMP3039 - Pankaj ChowdhuryWMP4042 - Puneet Mehrotra

WMP4043 - Rajeev Gupta

WMP4049 Sanjay GuptaWMP4062 Umashanker Akharia

Group 10 - Reliance Adlabs Acquisition Page 1 of 17


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Table of Contents

1 SUMMARY .................................................................................................... 3

2 MEDIA & ENTERTAINMENT INDUSTRY ............................................................. 3

3 ABOUT ADAG ................................................................................................ 4

4 ABOUT ADLABS ............................................................................................. 5

5 TARGET ANALYSIS ........................................................................................ 5

6 ACQUISITION MOTIVES .................................................................................. 6

7 SYNERGIES ................................................................................................... 6

8 CRITICAL SUCCESS FACTORS ......................................................................... 7

9 DEAL STRUCTURING ...................................................................................... 8

10 ACQUISITION PREMIUM .............................................................................. 8

11 MARKET ADJUSTED STOCK RETURNS ............................................................ 9

12 HR CULTURE ASPECTS ................................................................................ 9

13 POST ACQUISITION SITUATION ................................................................... 10

14 EXPLANATION ON PERFORMANCE & ANNOUNCEMENT ................................. 10

15 CONCLUSION ............................................................................................ 11

16 REFERENCES ............................................................................................. 11

17 EXHIBITS ................................................................................................. 12



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1 Summary

o On 30th June, 2005, ADAG group took 51 per cent stake in AdlabsFilms Ltd at a cost of Rs 360 crore at a rate of Rs 175 per share.

o RCL already held 5.02% in the company.

o Then Reliance Capital Group company made an open offer for 20% atRs 183 per share

o Stock Market was very optimistic about this deal & prices of shares

increased rapidlyo In next couple of years, EPS also rose due & re-confirmed the market

expectations. Index adjusted returns also shown positive trend.

o But at present, Reliance Media (erstwhile Adlabs) is facing problemsand its stocks are giving negative returns.

2 Media & Entertainment Industry

o 2006 Market Size was estimated at Rs. 61,000-crore

o Expected to reach Rs. 1,05,200-crore by 2013, at a CAGR of 19%

o Maximum growth expected in Television and Film segments

o More than 300 national and regional TV channels

o Close to 1000 films made every year

o Liberal FDI policies across all the segments of the industry

o Government focusing on regulations to give further impetus to theindustry.

Major constituents of Indian Media & Entertainment Industry


Live Entertainment

2%

Internet Advertising

0.3%

Outdoor Advertising2.5%

Print Media

30.9%

Radio

0.8%

Films

19.3%

Music

2.0%

Television

41.9%


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SWOT Analysis

STRENGTHS WEAKNESSES OPPURTUNITIES THREATS

Vast customerreach

Highly fragmentedEmerging concepts ofmovies

Piracy

Growing middleclass

Lack of cohesiveproduction anddistributioninfrastructure

Poor sections of thesociety

Lack ofqualitycontent

Change inlifestyles

Lack of efforts for mediapenetration

New distributionchannels

TechnologicalInnovations

Rapid deregulation

Low cost of

production

Rise in viewership

Technologicalinnovations likeanimation

Porters Five Forces Analysis of Industry

BargainingPower of

Consumer(High)

Threat ofNew

Entrants(Low)

Competitiveness within

industry (High)

BargainingPower of

Suppliers(Low)

Threats ofSubstitutes

Consumers canswitch Channels

High SunkCosts

HighlyfragmentedIndustry

Increasingnumber ofcontentsuppliers

SportingEvents

IncreasedGlobalization

High Capital High Fixed Costs Decreasingpower ofsuppliers

Cultural Events

Alternate source

of entertainment

Difficult

access todistribution

Highly perishable

products

Print Media

Steeperlearning curve

Highly DiversifiedRivals

Internet

3 About ADAG

o Reliance Entertainment is a wholly owned subsidiary of the Reliance

Anil Dhirubhai Ambani Group spearheading the Groups foray into the

media and entertainment space. Reliance Entertainments core focusis to build significant presence for Reliance in the Entertainment eco-system: across content and distribution platforms.



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o The key content initiative are across Movies, Music, Sports, Gaming,Internet & mobile portals, leading to direct opportunities in deliveryacross the emerging digital distribution platforms: digital cinema, IPTV,DTH and Mobile TV.

o Reliance ADA Group acquired Adlabs Films Limited in 2005, one of the

largest entertainment companies in India, which has interests in filmprocessing, production, exhibition & digital cinema.

4 About Adlabs

o In 2001, the company entered the burgeoning multiplex business

o Key player - production, distribution, exhibition

o 400 screens spread across India, US, Malaysia and Mauritius.

o Has produced like Gangajaal, Namastey London, Singh is Kinng etc

o Integrated Play on the M & E Sector gives competitive edge at eachlevel of the value chain

o Expansion through acquisitions acquired Rave cinema & Lotus Five

star

o Future Plans - to release 6-7 movies per year

o Adlabs Films owns a chain of multiplex theatres across the country, its

best known one being the IMAX Adlab theatre complex in Mumbai.

o The company was in the business of film production, distribution andexhibition, and has some well-known productions to its credit.

o The company had been planning to enter the TV content business as

well.

o Along with its digitization program for easier distribution of films, itsactivities would be complementary to that of Reliance Infocomm

5 Target Analysis

o Adlabs is in the business of film production and film processing with 8years of experience.

o Net worth of 103 crores, Total Income of 83 crores and PBT of 21

crores in 2005.

o Expertise in Content Development and Film processing.

o Own some 300 screens for distribution with some global foot prints.

o Success majorly depends on distribution channels and marketing.

o Promoters had more than 30 years of experience in this business.

o Company has been investing in infrastructure by owning multiplexesto reduce dependency on external channels.

o Adlabs had a dominant and comprehensive presence in Film Services:Motion Picture Processing and DI, Film Restoration, Digital Mastering,Studios and Equipment rentals



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6 Acquisition Motives

The Acquirer: Reliance

o Reliance had huge funds available coupled with strong distribution &

marketing capabilities.

o

Adlabs could be a springboard for larger ambitions in entertainment.This company had many popular contents like TV programs, movies,processing capacity.

o Find synergy with direct-to-home (DTH) ipTV, Reliance Mobile.

o Reliance Energy has applied to offer DTH while Infocomm, with 12million users, did a deal with Microsoft in 2003 to create, test anddeliver Internet TV, enabling phone and cable companies to deliverhigh-quality video over broadband networks.

The Target: Adlabs

o Money will be mainly used for multiplexes and film production.

o Multiplexes also need at least 40 large films on an average to survive.

o Adlabs will use money in adding multiplexes overseas, in areaslike distribution of films and theatre, as well as home entertainmentsegments.

o Reliance name will possibly provide easy tie-up with big-banners offilm industry.

7 Synergies

Operational Synergy

o Adlabs was already into movie making and multiplex business, but didnot have any new generation distribution channels like DTH, IP TV, andInternet etc. Acquisition by Reliance could bring the other distributionchannels as mentioned above.

o

Reliance already had ambitions plans to enter into the movie, itscontent and distribution business. Adlabs acquisition was a springboard jump to achieve its objective.

o The following picture depicts entire operational value chain ascombined together -



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Financial Synergy

o Leveraging the existing distribution channels from Reliance, can result

in economies of scale in distribution.

o The funds generated by acquisition can be used to expand globally

and invest further on new projects (movies) and infrastructure (eg,

multiplexes)

o Adlabs planned to use the money further into film distribution, theatre

and home entertainment.

o It was also evident that Adlabs will hugely gain financially by theGovernment management capability of ADAG group.

8 Critical Success Factors

o Being able to leverage the synergies created by the verticalintegration on promotion and distribution channels

o Investments in the media infrastructure by Adlabs

o Success of various media channels like DTH, IP TV for reliance


TV/

DTH/ IPTV

Mobile


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9 Deal Structuring

Previous Holding 1,255,000 4%

30-Jun-05 Prefertential Basis Shares 11,000,000 175 32%

30-Jun-05 Share Purchase Agreement 5,800,000 169 17%

1-Jul-05 Public Offer 8,360,150 183 24%

26,415,150 76%

1. Friendly TakeOver

2. Super Majority as per Companies Act, 1956, >75%

3. Acquisition by way of Share Purchase

4. Income Tax, Transfer of Shares so Capital Tax gain exemption under ITA

5. Provisions of Chapter 11 of SEBI take over code

6. Arrangement of SPA thru Escrow Agent

o R-ADAG first took negative control of the company by issuance ofPreferential Basis Share taking their stake in company to 36% stake.

o With next Share purchase agreement with Promoters they were able

to increase stake to 53 percent.

o It helped in acquisition of another 24% through public offer and at the

same time ensured no counter bid from competition.

10 Acquisition Premium

o We did Acquisition Premium analysis on the basis of three prices (a)day of transaction; (b) Average of Last 10 days & (c) Average Price oflast 2 months

Price Used belonging toStockPrice

Offer

Price

PremiumPer

SharePremium %

On the day of transaction 223 183 -40 -17.94Last 2 weeks avg. prior to publicannouncement

182.15 183 0.85 0.47

Last 2 weeks avg. prior to boradmeeting

177.68 183 5.32 2.99

Last 2 months avg. price 171.2 183 11.8 6.89

o It appears that overall deal was not very favorable for the

shareholders of Adlabs. Even after taking last two month averageprice, acquisition premium comes at 6.89% only.

o Surprisingly, market was very bullish about this deal and price ofAdlabs scrips shot sky-high. This is contrary to the normal marketbehavior.



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11 Market Adjusted Stock Returns

DateEPS

Stock

Price

StockReturn %

BSEBSE

Return %

AdjustedStock

Return %

Jul-05 6.9 249 - 7145 - -Mar-06

6.61 378 52%

11086 55% 3%

Jun-0721.46 564 49%

14431 30% 19%

Mar-08

9.95 619 10%

16015 11% -1%

Mar-09

-6.44 197 -68%

10348 -35% -33%

Mar-

10

-22.

8 218 11%

1759

0 70% -59%

o It is evident that company has not been able to deliver on the

promised made to investors.

o Adjusted Stock returns rose initially but are negative in last 3 years.

Even quantum of decrease is around 60% which is huge.

12 HR Culture Aspects

o Adlabs was acquired by giant Reliance which always have aura effect.It helped in smoother integration among the two cultures

o If we study the modes of acculturation in relation to both the firmsthen it will appear as below. Small circles represented situation ofcompany -

o For employees, it was relatively easier to accept culture of Reliance.For example, CFO i.e. Kirti Desai is still with the same group.


Integrati

on

Assimilatio

n

Separati

on

Deculturati

on

Integration

Assimilation

Separatio

n

Decultura

tion

9

Very much Not at all

How much Adlabs valued

preservation of their own Multi-Cultural

UniCultural

Degree of Multi-Culturaism at

Uni-Cultural


10/17

o But as usual founders face problems working under any other owner.Manmohan Shetty (founder) along with her daughter left Reliance-Adlabs nearly after 2 years of its acquisition.

13 Post Acquisition Situation

Source : Asian CERC

Mar'06 Jun '07

Mar'08

Mar'09 Mar '10

12mths

15mths 9 mths

12mths

12mths

Income Sales Turnover 103.46 320.09 270.35 485.27 460.04

Net Sales 103.46 320.09 270.35 485.27 460.04

Other Income 6.71 73.72 52.81 65.51 0.66

Total Income110.4

2393.9

2323.1

3550.7

4460.6

3

Employee Cost 6.34 20.04 22.73 56.46 59.69

Other ManufacturingExpenses 10.03 51.42 48.27 108.89 106.16

Selling and AdminExpenses 14.84 52.47 55.31 113.63 134.13

MiscellaneousExpenses 1.44 10.34 5.92 59.43 28.53

Total Expenses 61.56 192.07 165.19 399.75 381.38

Operating Profit 128.13 105.13 85.48 78.59

PBDIT 201.85 157.94 150.99 79.25

Interest 4.67 14.15 65.93 134.33

PBDT 197.18 143.79 85.06 -55.08

Depreciation 92.99 103.42 114.62 60.87

Profit Before Tax104.1

6 40.37 -29.56

-

115.95

Earning Per Share (Rs) 21.46 9.95 -6.44 -22.8

Equity Dividend (%) 50 50 0 0

Book Value (Rs) 78.19 147.01 117.59 93.14

14 Explanation on Performance & Announcement

o Expected Synergies with Marketing and Distribution Channels being

realized. Sales is 4X in 4 years.

o Financial synergies as expected are far below. Manufacturingexpenses have become 10X , Sales Expenses 9X, Interest 10X in 10years.



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o 2007 : Appointed the following persons as Additional Directors to holdoffice upto the date of the next Annual General Meeting viz: (i) Mr.Amit Khanna (ii) Mr. Sujal Shah.

o 2009 : Announced their establishing a BPO business for the media

space.

o

2010: Strengthened its international presence with the opening of adedicated film and media services facility in London that will offerfront-end, processing, restoration, 2D to 3D conversion and post-production services to broadcasters and studios.

15 Conclusiono ADAG acquired Adlabs as Mr. Anil Ambani was having extra cash after

splitting with his brother Mukesh.

o Reason for takeover seemed for strategic reasons like growth &

innovation, synergies like economies of scale & cross selling.

o He has substantially invested in the scalable industries which does not

require substantial infrastructure.

o Initially reaction from corporate & stock market was positive. They

have also shown good result in initial two years after acquisition.

o In year 2009 & 2010 they seems to lost the track & startedaccumulating losses. They also changed the name of company toReliance Media Works Ltd. in 2009 for corporate identity.

16 References

o IMaCS Analysis, FICCI-PWC Frames 2006 Report

o Reliance Offer to Adlabs shareholders document.

o Moneycontrol.com Reliance Media data for historical performance ofcompany


11

UniCultural


12/17

17 Exhibits

Appendix 1:

(Source - Actual letter of public offer copy sent by Reliance Capital to the shareholders of

Adlabs Films Limited)



13/17

Appendix 2- Balance sheet of company

Balance Sheet (in Rs. Crores)

Mar'06 Jun '07

Mar'08

Mar'09 Mar '10

12

mths

15

mths 9 mths

12

mths

12

mths

Sources Of Funds

Total Share Capital 19.9 19.9 23.06 23.06 23.06

Equity Share Capital 19.9 19.9 23.06 23.06 23.06

Reserves318.6

8 291.29 655.02 519.35 406.56

Networth338.5

8 311.19 678.08 542.41 429.62

Secured Loans 5.18 3.48 402.94 500.37 538.53

Unsecured Loans

459.9

2 579.94 519.75 714.36

1,256.

60

Total Debt 465.1 583.42 922.691,214.

731,795.

13

Total Liabilities803.6

8 894.611,600.

771,757.

142,224.

75

Application Of Funds

Gross Block107.9

9 302.23 794.991,052.

901,293.

64

Less: Accum. Depreciation 29.86 123.63 271.09 384.93 445.36

Net Block 78.13 178.6 523.9 667.97 848.28

Capital Work in Progress

227.9

9 161.34 309.45 186.4 187.1

Investments442.4

1 81.65 244.2 23.35 132.52

Inventories 1.3 1.62 1.92 5.18 5.97

Sundry Debtors 44.76 60.39 147.67 243.94 223.36

Cash and Bank Balance 3.48 45.44 19.97 11.99 14.67

Total Current Assets 49.54 107.45 169.56 261.11 244

Loans and Advances172.5

3 511.74 580.45 747.85 984.44

Fixed Deposits 10.03 85.39 51.56 28.69 32.73

Total CA, Loans & Advances 232.1 704.58 801.57

1,037.

65

1,261.

17Current Liabilities 26.9 81.03 188.22 123.66 173.43

Provisions150.0

4 150.54 90.14 34.57 30.89

Total CL & Provisions176.9

4 231.57 278.36 158.23 204.32

Net Current Assets 55.16 473.01 523.21 879.421,056.

85

Total Assets803.6

9 894.61,600.

761,757.

142,224.

75

Contingent Liabilities 30.19 172.6 195.56 272.34 470.69

Book Value (Rs) 85.07 78.19 147.01 117.59 93.14



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Source : Asian CERC



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Appendix 3- Financial Ratios of the company

Key Financial Ratios

Reliance-Adlabs (Reliance MediaNow)

Mar'06 Jun '07

Mar'08

Mar'09 Mar '10

Investment Valuation Ratios Face Value 5 5 5 5 5

Dividend Per Share 2.25 2.5 2.5 -- --

Operating Profit Per Share (Rs) 10.59 32.19 22.8 18.53 17.04

Net Operating Profit Per Share (Rs) 25.99 80.42 58.61 105.2 99.74

Free Reserves Per Share (Rs) 80.07 97.78 142.01 98.81 76.99

Bonus in Equity Capital 42.71 42.71 36.85 36.85 36.85

Profitability Ratios

Operating Profit Margin (%) 40.74 40.03 38.89 17.61 17.08

Profit Before Interest And Tax

Margin(%) 30.53 9.22 0.58 -5.6 3.71Gross Profit Margin (%) 42.92 48.44 0.64 -6 3.85

Cash Profit Margin (%) 32.29 46.83 36.12 10.4 -8.07

Adjusted Cash Margin (%) 31.29 43.46 36.12 10.4 -8.07

Net Profit Margin (%) 24.14 22.42 15.42 -5.71 -22.03

Adjusted Net Profit Margin (%) 23.03 19.04 15.42 -5.71 -22.03

Return On Capital Employed (%) 4.8 10.72 1.8 0.31 1.56

Return On Net Worth (%) 7.77 27.45 6.76 -5.48 -24.47

Adjusted Return on Net Worth (%) 7.41 23.31 0.59 -11.15 -23.14

Return on Assets ExcludingRevaluations 2.68 78.19 147.01 117.59 93.14

Return on Assets IncludingRevaluations 2.68 78.19 147.01 117.59 93.14

Return on Long Term Funds (%) 4.83 30.83 2.67 0.53 3.61

Liquidity And Solvency Ratios

Current Ratio 1.24 0.86 1 1.19 0.86

Quick Ratio 1.3 3.03 2.79 6.41 6.02

Debt Equity Ratio 1.37 1.87 1.36 2.24 4.18

Long Term Debt Equity Ratio 1.36 -- 0.59 0.92 1.25

Debt Coverage Ratios

Interest Cover 43.55 21.72 2.17 0.09 0.28

Total Debt to Owners Fund 1.37 1.87 1.36 2.24 4.18

Financial Charges Coverage Ratio 39.06 40.45 9.35 1.82 0.71

Financial Charges Coverage RatioPost Tax 29.95 39.2 11.55 2.29 0.67

Management Efficiency Ratios

Inventory Turnover Ratio 83.6 235.84 183.91 206.5 151.88

Debtors Turnover Ratio 2.55 6.09 2.6 2.48 1.97

Investments Turnover Ratio 86.92 246.87 183.91 206.5 151.88

Fixed Assets Turnover Ratio 0.56 1.25 0.65 0.63 0.46

Total Assets Turnover Ratio 0.13 0.42 0.22 0.33 0.24

Asset Turnover Ratio 1.04 1.8 0.65 0.63 0.46Average Raw Material Holding -- -- -- -- --

Average Finished Goods Held -- -- -- -- 0.31

Number of Days In Working Capital 191.93 664.99 522.54 652.41 827.03



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Profit & Loss Account Ratios

Material Cost Composition 25.35 15.63 8.77 7.48 5.21

Imported Composition of RawMaterials Consumed -- -- -- -- --

Selling Distribution CostComposition 2.83 4.72 3.28 2.95 3.49

Expenses as Composition of TotalSales 6.99 21.23 4.5 4.74 0.01

Cash Flow Indicator Ratios

Dividend Payout Ratio Net Profit 38.81 13.62 29.39 -- --

Dividend Payout Ratio Cash Profit 28.91 6.52 9.03 -- --

Earning Retention Ratio 59.31 83.96-

232.06 -- --

Cash Earning Retention Ratio 70.06 92.97 87.45 100 --

Adjusted Cash Flow Times 13.64 3.52 8.58 22.44 --

Earnings Per Share 6.61 21.46 9.95 -6.44 -22.8

Book Value 85.07 78.19 147.01 117.59 93.14

Source : Asian CERC



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49417192 M a Grp10 Reliance AdLabs Final Report V2 1

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