Was Ronnie Screwvala forced to sell out to Disney?
Moneylife Digital Team 17 August 2011

Ronnie Screwvala’s sellout to Walt Disney has been hailed as a blazing exit. But he made much less money than the media thinks, points out an astute investor, because a lot of Screwvala’s shares were pledged

It is surprising as to why would Ronnie Screwvala, who founded UTV Software Communications in 1990 would like to sell off the business to Walt Disney after running it successfully for more than 20 years. Is he not able to manage UTV? Is he not seeing a future for the Indian media industry? Is Disney forcing him to exit? Is he bored of being an entrepreneur and wants to become an employee now? Amit Bagaria, an astute investor, has been digging into the financials of Mr Screwvala's holding and has come to an interesting conclusion as to what could have triggered Mr Screwvala's decision to completely exit from UTV.

But first, what does Mr Screwvala make out of the deal? It's much less than what the media is led to believe. Mr Bagaria points out that "to augment growth for his cash-guzzling media business Ronnie Screwvala placed a majority stake (93.52 lakh shares @ Rs860.79 per share in February 2008) to Disney and at the same time, issued warrants to himself, to be converted in the next 18 months (45.32 lakh shares @ Rs860.79 per share). The warrants would enable Ronnie to maintain his shareholding equal to Disney's shareholding of close to 40%. But then the financial crisis of 2008 deepened when Lehman Brothers went bust and UTV shares eventually plummeted to less than Rs200. In November 2009, at the time of conversion of shares, Ronnie Screwvala had to let his warrants lapse (because his conversion would happen @Rs860 against the prevailing price of Rs450). Thus Disney became the majority shareholder in UTV and Mr Screwvala had to forfeit the 10% of the warrant value paid during the allotment. Later on after mergers and amalgamations of several of UTV's subsidiaries with itself, Disney's stake came down to a little more than 50% thus making Disney the new promoter.

Toward the end of last month The Walt Disney Company Pte Ltd. announced its plans to acquire UTV Software Communications Ltd. The company plans to subsequently delist the equity shares of the company from the stock exchanges and on successful delisting, the company will acquire the 20% stake held by the promoters. Mr Screwvala currently holds 80,52,680 shares in the company and assuming an exit price of Rs1,000 (as indicated by Disney), his stake is valued at Rs800 crore. In early 2008 when he parted with a sizeable stake to Disney to fund his expansion plans, he was holding 80,83,680 shares in the company @Rs1,000 (the stock price at that point in time) which was worth Rs800 crore and he was the majority shareholder. Clearly, three-and-a-half years later Mr Screwvala has given away the control of UTV, and become an employee of Walt Disney and earned less for it. According to Mr Bagaria, this is "a classic case where the promoter puts in a great deal of hard work to create assets and to create a great brand but fails to capitalise on the same." The question is, why would Mr Screwvala do this?

Pledged Shares

According to the company's filings, Mr Screwvala currently holds 80,52,680 shares in the company and nearly 60% of the shares were pledged. Therefore after Disney pays him, he would have to repay the money he had raised against this pledge and would be left with a significantly lesser amount than what the media headlines suggest.

Since March 2009, the last quarter of FY2008-09, wherein the promoters pledged 81% of their shares, the percentage of pledged shares has never been below 70% until the past three quarters. The borrowings of the company also more than doubled in FY09-10 to Rs789 crore from Rs347 crore in FY08-09.

Is it that Mr Screwvala was forced to sell out because he is unable to repay the loan raised against the pledge? We tried contacting the company and Mr Screwvala but have received no reply from them as yet.

Mr Bagaria suspects that Mr Screwvala sold out to repay the money he had raised by pledging his shares and if you take that into account, he walked away with much less money than what the media tends to believe and broadcast. "He pledged his stake worth Rs470 crore with financial institutions and it seems was being pressured by them to pay up. As he was unable to manage funds from other sources, he was left with no choice but to sell his company."

 If Mr Bagaria is right, Mr Screwvala would have pocketed a net Rs800 crore had he sold UTV completely in early 2008, (with control premium it would have been ever higher) while now all that he is left with is Rs800cr-Rs470cr=Rs330 crore. Seems like a case where shares pledged by the promoter ended up with him losing control of his entire business.

Based on his analysis, Mr Bagaria also raises wider issues of share pledging. He asks "how beneficial is share pledging for Indian promoters? Think of Great Offshore when you answer this. Are Indian entrepreneurs as dynamic and successful as they are projected to be? Think of Ronnie Screwvala when you answer this. Great Offshore promoters lost control over their company after they heavily pledged their shares to pursue growth. Mr Bagaria points out "Hopefully other young, growth-hungry, aggressive Indian promoters would learn something out of this episode." No chance of that happening.

Comments
SonJoy sharma
1 decade ago
Question is what did Ronnie do with the cash from the pledged shares...
Amit
Replied to SonJoy sharma comment 1 decade ago
Thats a million dollar question... no clear answer for it... i am sure that money has not got into UTV.. nor has he bought stake with the pledge money otherwise his holding would have gone up.. the only probable answer is that the money must have gone into some personal venture.
subramanyam
1 decade ago
Moral of the story: Media business is bad - you end up losing money for the shareholder and the viewer! Long live media employees!!
subramanyam
1 decade ago
the whole argument can come to a stand still UNLESS you know what he did with the borrowed money. It is too big an amount and could have appreciated in some other asset. Also the valuation assumption is always co. will DO BETTER -but 2008 happened. If the whole deal was stuck in 2008, it would have been a distress sale..too much is hindsight. Lets fact it having been in the markets from 1979..every stage from 3000 to 21000 looked like a bubble!
kanu doshi
1 decade ago
This is interesting. What needs to be understood is why are promoters pledging their shares in the first place? What do they do with the borrowed funds? Amit Bagaria pl do this research.
Results will throw up startling facts,least of all 'sympathy' for the promoters.
Ashok Chowgule
1 decade ago
Can we have an analysis of the TV channels, IBN and NDTV? Both have been making consistent losses for some years. It is necessary for the public to know how they have been financed. Also, about two/three years ago NDTV, through an indirect subsidiary in the UK, raised $250mn. How has this affected the position of other shareholders? And where was the money used?
Amit Bagaria
Replied to Ashok Chowgule comment 1 decade ago
Hi Ashok,

Your observation is correct. All media companies in India has failed to create any wealth for shareholders. Most of the money raised is invested into risky new business ventures which makes losses for first few years and then they realize it and close the venture. If you really want to have an insight about how these companies are doing.. try analyzing the latest corporate restructuring by Network 18 group.
Deepak Shenoy
1 decade ago
Ronnie got some money for pledging shares, didn't he? He must have borrowed around 200 cr - was that money stolen? That's money he used then?

Is it right to just subtract the debt he had from his earnings, and say he got a raw deal? He must have used the borrowed money for something; and when one borrows beyond one's means it's not often that we all feel sorry for him.

The other explanation is that the company took on the debt, lost money and promoters shares were pledged against it. This is common in India, although strange - why should a promoter lose money if the company's borrowing it? But then it was a bad business - Screwwala is lucky to get away with some surplus; most others are not as lucky.

As for warrants, a significant number of promoters have lost money in warrants issued in 2007-08 where stocks are way below warrant prices.
Amit Bagaria
Replied to Deepak Shenoy comment 1 decade ago
HI Deepak,

You are absolutely right when you raise the point about the money he raised by pledging his shares. Now where that money has been deployed is a mystery. But i believe it has gone into some unrelated business outside UTV. Now the nature is difficult to find out.


Prakash
1 decade ago
I understand that somewhere in 2009 SEBI decided to make disclosure of pledged shares mandatory and the listed companies have to inform the public.

I would like to know how can an investor come to know of pledged shares of a listed company where he is already an investor or wishes to invest. Is it available on BSE website or mandatory to put it up on company website ?
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