Disney, Reliance Start Antitrust Diligence on Media Merger

Potential Mega-Merger: Disney and Reliance Industries

Source: Originally reported by Reuters on January 5, 2024

Analysis for Layman

American entertainment giant Disney and Indian billionaire Mukesh Ambani’s Reliance Industries are advancing discussions on a potential mega-merger of their India media assets. The due diligence process is underway, with Reliance appointing Indian firms Khaitan & Co and Shardul Amarchand Mangaldas, and Disney appointing AZB & Partners. This indicates progress in combining their TV channels, streaming platforms such as Disney+ Hotstar, and JioCinema into a unified entity.

Reliance is expected to maintain over 50% control in the merged firm, making it a dominant entertainment powerhouse in India with extensive reach. However, complex antitrust reviews lie ahead, especially regarding market dominance in streaming and TV broadcasting. Regulatory clearance may necessitate asset sales, making the full terms of the deal fluid.

Disney, Reliance Start Antitrust Diligence on Media Merger

Impact on Investors

For retail investors, the implications are mixed based on underlying exposures. Reliance may strengthen its media presence and unlock synergies with Disney content, benefiting shareholders, including minority investors and tech fund partners. The deal might also involve a partial stake sale in the new entity to raise funds. However, uncertainties in Disney India’s performance make the near-term accretion for Disney shareholders uncertain.

In the broader media space, competitors like Zee and Sun TV may face tougher competition in the long run. Production houses could initially gain leverage as investments rise to feed streaming platforms but may lose pricing power later as the combined entity consolidates. Investors need to monitor progress against hurdles like antitrust reviews and the final structuring of the deal, with low payoff visibility amid fluid terms.

Impact on Industries

If the $12 billion Indian media and entertainment sector witnesses the completion of the mega-merger, it may face significant disruption. The combined entity would become a giant in both online and offline entertainment, boasting a substantial paying subscriber base for digital services and a vast TV audience reach for monetization. Linear TV broadcasters and regional channels may face advertiser loss, although regulatory caps aim to prevent absolute dominance.

Production houses and content creators could initially gain leverage with increased investments for streaming platforms, but they may lose pricing power later as the combined entity consolidates. Overall, industry consolidation in the OTT space would be accelerated, requiring a reassessment of telecom bundling strategies by players like Airtel and Jio. The next media rights auction cycles for key properties, such as IPL, would see intense bidding, introducing market skew despite antitrust oversight.

Long Term View

Over a 5-10 year horizon, the merged entity could leverage content creation synergies from global Disney IP and Indian production houses, creating an aggregator platform that combines linear TV and streaming with top Indian and international content. This strategy could aid paying subscriber conversions while still monetizing through advertising.

However, market shifts may force remaining players to consolidate, focus on niche attention areas, or exit. The accelerated adoption of streaming is positive but poses risks of uneven market power, requiring measures such as pricing curbs for premium content to check dominance.

For Reliance and Disney, the significantly expanded reach would facilitate direct monetization and cross-promotion potential across various entertainment offerings in ecommerce, telecom, etc. Sustained leadership investment and managing tradeoffs in merging large legacy organizations are imperative for unlocking value.

Short Term View

If deal talks progress, the next 12-18 months will see due diligence advancing towards definitive merger terms. However, uncertainty persists on the final structure due to regulatory barriers, necessitating close tracking by investors.

Reliance may accelerate efforts to expand original content and digital offerings for Jio consumers by leveraging Disney IP even before the deal. Disney gains flexibility in refining its India OTT strategy.

Industrywide, more tentative big-ticket investments await the impact of the merged entity, reshaping the market significantly only 12-24 months post-merger. Sentiment may see volatility around perceived winners and losers, with many second-order effects requiring assessment amid temporary flux, such as telecom bundle plans and advertising rates outlook.

Possible Impacts of Disney-Reliance Merger on Companies:

Indian Companies Potentially Gaining:

  • Media Production Companies: (e.g., Eros International, Balaji Telefilms, Yash Raj Films): A larger combined entity could offer more production contracts and distribution channels, benefiting content creators.
  • Digital Marketing Agencies: (e.g., WPP India, Madison Media, DDB Mudra): The merger could create a powerful advertising platform, leading to increased digital marketing budgets and campaign opportunities.
  • Telecom Infrastructure Providers: (e.g., Bharti Airtel, JioFiber, Vodafone Idea): Reliance’s Jio network could reach a wider audience with Disney’s content, potentially driving demand for data plans and network expansion.
  • Content Delivery Networks: (e.g., Akamai, Amazon CloudFront, CloudFlare): Increased streaming traffic from the merged entity could boost demand for CDN services to ensure smooth content delivery.

Indian Companies Potentially Losing:

  • Existing Streaming Services: (e.g., SonyLIV, Amazon Prime Video, Netflix): The new giant could dominate the market, making it harder for smaller platforms to compete for subscribers and content.
  • Independent TV Channels: (e.g., Zee Entertainment, Sun TV Network, Viacom18): Reliance and Disney control over 120 channels, potentially squeezing out viewership and advertising revenue for smaller channels.
  • Regional Media Companies: (e.g., Asianet, Sun TV Network, TV9): The merger could prioritize national content, potentially reducing opportunities and visibility for regional languages and stories.
  • Antitrust Regulators: (e.g., Competition Commission of India): The intense scrutiny and potential asset divestment could delay the merger process and impact investor confidence in the sector.

Global Companies:

  • Content Acquisition Platforms: (e.g., Roku, Amazon Fire TV, Apple TV): If the combined entity distributes its content primarily through its own platform, it could reduce content availability on other platforms, impacting their user base and subscription revenue.
  • Hollywood Studios: (e.g., Warner Bros., Universal Pictures, Paramount Pictures): Reliance-Disney control over distribution channels could limit access to the Indian market for other studios, potentially affecting their global revenue.

Market Sentiment:

  • Short-term: Uncertainty and volatility as the regulatory process unfolds. Companies directly involved in the merger and related sectors could see higher trading volume.
  • Long-term: Depends on the final structure of the deal, regulatory approvals, and execution. A successful merger could create a dominant player in the Indian media landscape, impacting market dynamics and investor preferences in the entertainment sector.
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