Anil Ambani group company Reliance MediaWorks continues to bleed. Now, its partner, Digital Domain, has filed for bankruptcy and Reliance MediaWorks may have an exposure of about Rs150 crore to this US-based visual effects company. Reliance MediaWorks’ shareholders continue to pay for the misplaced adventurism of the company
Shares of Reliance MediaWorks (RMW), the Anil Dhirubhai Ambani (ADA) group company, fell by over 7% in the morning trade on Wednesday following reports that its US-based partner Digital Domain Media Group Inc has filed a voluntary bankruptcy petition.
According to media reports, financially struggling Digital Domain, owner of one of the entertainment industry's leading visual effects companies, has said that it filed a Chapter 11 petition with the US Bankruptcy Court in Delaware as part of an effort to “ensure the long-term future of its core business” and trigger a “sale of assets”.
Last year, the ADA group company partnered with Digital Domain, founded in 1993 by ‘Titanic’ and ‘Avatar’ director James Cameron and others to open studios in London and Mumbai and offer various post-production services. According to reports, RMW may have exposure to the tune of Rs150 crore in Digital Domain.
While Digital Domain has been incurring steep losses in recent years, it was same story at RMW as well. RMW is planning to sell off its Big Cinemas franchise to its arch rival Inox Leisure in order to pare down its massive debt. According to those close to the deal, Anil Ambani expects to get around Rs150 crore from the deal while Inox is willing to pay less Rs100 crore.
After fighting bitterly for Fame India, both RMW and Inox ended up with 22.38% and 73.14% stake, respectively in the film exhibitor, which owns 95 screens across 12 cities in India. The ADA group tried very hard to take control of Fame India, but failed to do so. However this setback made Anil Ambani go in for Hollywood and Bollywood and a whole lot of other expansion and thus incurring losses.
For the 12 months ended 31 March 2012, RMW’s net losses swelled to Rs572.16 crore and its net worth stood at a negative Rs239.58 crore. What is pertinent is that the ADA group company’s auditors have questioned whether RMW would ever able to continue as a going concern basis. In a review released in February, it said that the erosion of net worth casts a doubt about the company’s ability to continue as a going concern.
Share price movement of RMW
The company had taken massive amounts of debt to ward away competition, especially from Inox, and acquire various properties, including splurging on the landmark joint venture with Steven Spielberg’s DreamWorks. Such ambitious plans saw the company’s current liabilities swell up to Rs2,317.31 crore as of 31 March 2012 as against its capital of Rs23.06 crore.
Earlier in July, the ADA group company claimed to have found a private equity (PE) fund that was interested on buying ‘minority’ stake in RMW's film and media services division for Rs605 crore. And this was not the first time the limping entertainment business of the ADA group has claimed to have got large investment from foreign funds.
Four years ago, billionaire investor George Soros was supposed to invest $100 million for buying a 3% stake in Reliance Entertainment. Both parties signed a term sheet in March 2008. However, the deal was stuck later over valuation of the company and other issues.
The ADA group in general has been strapped for cash because many of its businesses have been doing badly—as is reflected in stock prices which have hit multi-year lows.
Coming back to Digital Domain, the bankruptcy filing has come a week after it defaulted on a $35 million loan to a group of investors led by New York-based Tenor Capital Management Co. Last week, it also decided to close down its animation studio in Port St Lucie and lay off about 320 employees.
Digital Domain has also reached a deal to sell its Venice-based unit Digital Domain Productions Inc, to private investment firm Searchlight Capital Partners for $15 million, subject to approval from the bankruptcy court.
As of 30th June, Digital Domain Media Group said it had assets of $205 million and liabilities of $214 million. Digital Domain has created effects for more than 90 movies, including ‘Titanic’, ‘Tron: Legacy’, ‘Pirates of the Caribbean: At World's End’, and ‘Transformers’.
At 1.09pm, RMW was trading 4% down at Rs63.4 on the BSE, while the benchmark Sensex was marginally up at 17,905.
“The next 2-3 years could witness a significant clean-up of the system as several orders placed with BHEL, by its customers, could be restructured, cancelled or deferred,” says a Nomura Equity Research report
Some of BHEL’s private sector customers have been named by the Central Bureau of Investigation (CBI) in the alleged coal allocation scam, widely referred to as ‘Coalgate’. While the status of coal mines allotted to them remains uncertain, Nomura Equity Research in its report highlights the potential risk to BHEL’s order book from projects that were ordered on the back of these mine allocations. It is now a credibility issue for BHEL’s order book, points out Nomura.
Several equipment orders placed in the past (especially to Chinese firms) are potentially fake orders and were placed in order to favourably boost their chances of securing coal mine allocation. Nomura believes the next two to three years could witness a significant clean-up of the system as several orders could be restructured, cancelled or deferred. While one can argue that advances would have been paid against potential fake orders too, the global brokerage firm highlights that such advances would have been negligible given the magnitude of gains that these coal mines would have delivered to the promoters.
The proposed means of improvement in coal supply could, in fact, halt near-term order inflows for BHEL. Complying with the directive from the Prime Minister’s Office, Coal India (CIL) has initiated the process of signing fuel supply agreements (FSAs) with power plants having long-term power purchase agreements (PPAs) which are expected to be commissioned by 31 March 2015. However, Nomura notes that the order could increase uncertainties on new order inflows for BHEL. How will the scenario change?
Earlier, power developers signed Letters of Assurance (LOAs) with CIL and hoped to get at least some coal on a priority basis to start the power plant. However, based on the new development, the projects will be evaluated to confirm whether the LOA will be converted into FSA. Nomura expects the Central Electricity Authority of India (CEA) to notify the list of projects shortly. Nomura says that there will be certain projects which will not feature in this list. These projects are likely to face pressure from lenders on account of increased fuel uncertainty and may be delayed/ cancelled.
Even though the bulk of the Twelfth Five-Year Plan orders are already finalised, projects not in the notified list and yet to order equipment will have to wait for the results of the coal block auctions for fuel security. Decision-making for equipment orders placed with BHEL, thus, could be delayed further, in Nomura’s view.
For several months now, there has been speculation regarding the implementation of an import duty on imported power equipment. Nevertheless, Nomura believes that the proposed duty is still a non-issue.
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