Tata Sons, holding company of the Tata Group, is looking at the option of offloading a part of its 60 per cent stake in the loss-making direct-to-home Tata Sky Ltd to private equity players and institutional investors and raise funds for the satellite TV company's growth plans.
Private equity firm Temasek is exiting the company by selling its 10 per cent stake while Rupert Murdoch's Network Digital Distribution Services will pare part of its 30 per cent stake, according to a source close to the development.
"The company has a good business model in the long run but for the next few years it will continue to make huge losses. It has negative net worth," an investor who was approached for the stake sale told Business Standard.
The company started operations in August 2006 and the Tatas are looking at selling 10-15 per cent of their stake. For fiscal 2011-12, Tata Sky made a net loss of Rs 298 crore (Rs 2.98 billion) on net sales of Rs 1,590 crore (Rs 15.9 billion) as compared to a net loss of Rs 470 crore (Rs 4.70 billion) on net sales of Rs 1,350 crore (Rs 13.5 billion) recorded in the previous fiscal.
The source also said a proposal was made by the Tatas to Videocon to merge their direct-to-home businesses but the latter declined, seeking a better valuation.
When contacted, STAR India CEO Uday Shankar declined to comment. An email sent to Tata Sons did not elicit any response till the time of going to press. A spokesperson said over the phone that Tata Sons would not comment on the stake sale.
According to the source, Tata Sky needs Rs 500 crore (Rs 5 billion) of equity infusion each year to service debt and meet capital expenditure plans. As some shareholders want to cash out, the hunt is on for new investors.
The Tatas will continue to hold a majority stake in the company while the other two investors, including Murdoch, will pare their investment substantially. The company would continue to use the Tata brand name, the source said.
The valuation of Tata Sky is likely to be around $1.5 billion, taking into account the valuation of its listed peers such as Dish TV. As on November 22, Dish TV had a market capitalisation of Rs 7,784 crore (Rs 77.84 billion).
The Indian DTH market is growing by double-digit percentage figures - thanks to the recent digitisation drive across metro cities. Though the DTH companies have been able to make inroads into the cable & satellite market in India, subscriber acquisition costs and churn rates remain high.
Analysts tracking the industry say weak earnings of five per cent and lower returns on capital employed could encourage several DTH operators to sell stake via foreign capital. The raising of FDI limits by the government in the sector in September this year is likely to be a positive for the sector.