The reported buyback of Temasek’s 20 per cent stake in Tata Play by Tata Sons will be the third instance of Tata Group providing an exit to a foreign partner in recent years.
In 2018, Tata Sons paid $1.27 billion to DoCoMo to buy back 26 per cent of the group’s telecommunication venture, Tata Teleservices.
This was followed by Tata Sons acquiring AirAsia Berhad’s 49 per cent stake in AirAsia India in two tranches to make it a wholly owned subsidiary.
AirAsia India became Tata Sons’ fully owned subsidiary in 2019.
All of these buybacks and exits by foreign partners largely occurred due to the poor financial performance of the joint ventures, making it tough for foreign investors to sell their stakes to other investors.
For example, Tata Teleservices reported a net loss of Rs 17,630 crore on net sales of Rs 5,156 crore during the year ending in March 2018 (2017-18).
The company’s net worth was (minus) Rs 25,023 crore at the end of March 2018 due to accumulated losses.
Similarly, AIX Connect (formerly AirAsia India) continued to lose money and reported a net loss of Rs 2,750 crore on net sales of Rs 4,310 crore during 2021-22 through 2022-23 (FY23).
According to media reports, Tata Sons’ deal with Temasek is expected to value Tata Play at around $1 billion, or around Rs 8,300 crore.
This will value Temasek’s 20 per cent stake in the company at around $200 million, or Rs 1,660 crore.
Analysts say that if the deal happens at such a price, it will be a kind of bailout by Tata Sons, given the currently low valuation of Tata Play.
Based on its balance sheet for FY23, Tata Play’s enterprise value (EV) is Rs 3,093 crore, or $372 million.
We have used its net worth, total borrowings, and cash and equivalents to arrive at its EV.
According to analysts, Tata Play is now facing financial headwinds and a challenging growth environment due to the rising popularity of streaming services such as Netflix, YouTube, and Amazon Prime, among others.
An analyst at a domestic brokerage said that valuations for the players in this space have come down over the past two and a half years due to competitive headwinds and low single-digit growth for the sector.
In February 2021, Bharti Airtel bought US private equity firm Warburg Pincus’ 20 per cent stake in its direct-to-home television (TV) unit for Rs 3,126 crore.
The deal valued the company at 7.6x its operating profit.
The company reported a net loss of Rs 105 crore on a consolidated basis in FY23, and its net sales were down 5.1 per cent year-on-year to Rs 4,499 crore last financial year.
With this, Tata Play’s net sales have contracted by around 27 per cent from its all-time high net sales of Rs 6,104 crore in 2018-19 (FY19).
The decline in revenues made it tough for Tata Play to maintain its profitability.
It reported a net loss of Rs 70.8 crore in 2019-20 compared to a net profit of Rs 462.9 crore in FY19.
The decline in revenues and poor profitability has also resulted in a deterioration in its balance sheet and a decline in its net worth or shareholder’s equity.
The company’s net worth declined to (minus) Rs 499 crore in FY23 from (minus) Rs 395 crore a year ago and (minus) Rs 45 crore in FY19.
This was due to a continued rise in its accumulated losses, which grew to Rs 2,857 crore in FY23 from Rs 2,753 crore a year ago.
The company has tried to compensate for the decline in its pay TV service by entering the broadband market through a wholly owned subsidiary — Tata Play Fiber.
This business, however, is still in its infancy and remains loss-making.
The company has also expanded into the over-the-top (OTT) platform and streaming services with Tata Play Binge, an OTT platform.
Analysts, however, say that it will take years of investment and growth in these new ventures to fully compensate for the decline in its core business of pay TV.
Temasek owns about 20 per cent of the content distribution platform.
Temasek first invested in Tata Sky, as it was known at the time in 2007, according to its website.
