New entrants will test TVB, ATV duopoly
If the share price of Television Broadcasts is any guide, investors have switched off a potential takeover of Hong Kong's dominant free-to-air television network.
When talk of sale of control of TVB made news in late September, the shares jumped 17 per cent to HK$46.50. Since then, they have tumbled to trade at about HK$42 while the overall market has climbed.
It isn't the first time TVB's controlling shareholder and co-founder Run Run Shaw has entertained the idea of selling his shares, only to hold on to them. But the older he gets - he's now 102 years old - the more likely a deal gets done.
Shaw founded TVB four decades ago and it has dominated Hong Kong's free-to-air scene over its only rival, Asia Television (ATV), recently roiled by a shareholder dispute and management upheaval.
The free-to-air scene is about to get more interesting as the cosy duopoly ends. Three new entrants have applied to join the fray, including telecommunications entrepreneur Richard Li Tzar-kai, who already controls Now TV, a pay-television service.
The Broadcasting Authority opened the door to applications last year and says it expects to make some recommendations to Hong Kong's top lawmakers in the first half of 2011. A spokeswoman for the media watchdog says there's no limit on the number of licences that might be issued. It's widely expected that at least one will be issued, and some media analysts think all three might be granted.
The two established networks operate English and Chinese-language channels. Control of closely held ATV was the subject of a messy shareholder fight between Taiwanese investor Tsai Eng-ming and Wong Ching, a mainland property tycoon who loaned money to ATV. In September, the regulator allowed a 52.4 per cent stake in ATV to be put in the hands of a relative of Wong's, a Hong Kong-based businessman.
'It's a good thing that capital is interested in Hong Kong TV, no matter whether it's local or from the mainland,' Samson Tam Wai-ho, a representative for the information-technology industry on the Legislative Council, said. 'It means the market believes there is room for expansion.'
Free-to-air dominates Hong Kong's television space and TVB is the dominant player. Shaw owns 26 per cent through his listed Shaw Brothers (Hong Kong), and personally controls roughly another 6.5 per cent. Among potential bidders eyeing the company is Peter Lee Ka-kit, the elder son of Henderson Land Development chairman Lee Shau-kee.
A TVB spokesman declined to comment further, saying: 'The rumours of selling TVB stock have appeared in the market every couple of years as people think Sir Run Run is old.'
A spokeswoman for Peter Lee said he was 'still studying the possibility of purchasing TVB', but she would not comment on a purchase price. (Lee's father was involved in an unsuccessful offer for TVB in 2008.)
Any buyer would be expected to pay a premium for control but, under Hong Kong stock exchange rules, doesn't have to make a general offer to all shareholders. Therefore, Deutsche Bank recently cautioned in a note to clients that any 'premium paid for a controlling stake might not be reflected in the share price'.
At current share prices, Shaw's 32.5 per cent stake in TVB is valued at about HK$6 billion. Vivek Couto of research concern Media Partners Asia says a prospective buyer would likely have to pay between HK$9.6 billion and HK$11.5 billion - implying a premium of 60 per cent to 90 per cent - to gain control.
According to CSM Media Research, based on measurements taken between January and September, free-to-air channels captured 81 per cent of viewers, compared with 19 per cent for all pay-television channels broadcast in Hong Kong.
Within the free-to-air space, TVB's Chinese channel had a market share of 79 per cent, compared with ATV at 21 per cent. TVB's English-language channel had a 75 per cent share, while ATV's was 25 per cent.
Still, critics say that as a result of the lack of competition, the overall quality of programming has deteriorated over the past few years.
According to a survey of 1,000 respondents conducted last July by the Hong Kong Research Association, an independent group, 47 per cent called the quality of free-to-air programming 'just so-so', while 21 per cent said the programme quality was disappointing or very disappointing.
Both TVB and ATV produce their own programming, and their dramas were once all the rage on the mainland and Southeast Asia in the 1980s and 1990s. However, in recent years, the two networks have vied with each other to import television dramas, mostly from the mainland, Japan and South Korea.
'These days, the TVB dramas are copies of what we have seen 20 years ago,' sniffs Robert Chua Wah Peng, one of TVB's first executive producers.
Some viewers hope competition from new players will boost the quality of programmes on offer. City Telecom (HK) was the first to apply on December 31 last year. Fantastic Television, a wholly owned subsidiary of pay-television provider i-Cable Communications, applied in January. HK Television and Entertainment, which is owned by Richard Li's PCCW Interactive Media Holdings, a broadband and cable television provider, followed in March.
In their respective applications, City Telecom and Fantastic TV said they each intended to invest more than HK$1 billion in the first six years of operation. PCCW said it would invest more than HK$600 million in the first three years. By comparison, TVB spent HK$1.3 billion in the first half of this year, including HK$571 million on programming such as the cost of producing local dramas and purchasing rights to films.
In the long run, the newcomers would nibble away at TVB's lead, Morgan Stanley researcher Jenny Wu said. But she expects TVB to hold its own in the short term, given that it has a comprehensive production system - from scouting for potential stars to training them to tailoring programmes for them.
'We believe no other TV [station] will provide content that can compete with TVB in quality and scale,' Wu said.
Besides dominating the Hong Kong market, TVB is a major Chinese television programme distributor worldwide. Its programmes mainly cover Southeast Asia, including Malaysia, Singapore and Indonesia. It also owns a pay-television channel in Taiwan, TVBS, which last year accounted for 15 per cent of the company's total turnover of nearly HK$4 billion.
TVB entered the pay-television market in Hong Kong in 1998 and holds 60 per cent of TVB Pay Vision. But that venture has been a loss-maker. It also has a partnership with Shanghai Media Group, one of the mainland's biggest media companies; that joint venture currently is producing a 30-episode television drama.
Shanghai Media's name surfaced as a potential buyer last month after Shaw put TVB in play. But the TVB spokesman said that given that Hong Kong's broadcasting rules stipulated a controlling shareholder must have a Hong Kong identity card, 'I think it's difficult for SMG'. In Shanghai, an SMG spokeswoman said the company was not 'interested in acquiring TVB'.
Last year, TVB posted a net profit of HK$900 million, down 15 per cent from a year earlier. But Morgan Stanley estimates earnings will bounce back to HK$1.23 billion this year and HK$1.43 billion in 2011.
TVB shares closed yesterday at HK$42. Deutsche Bank is advising its clients to buy the shares up to HK$46.41.
After TVB's first-half results were announced in August, Deutsche Bank said 'we believe management has done a fantastic job in curbing costs' and raised its full-year after-tax profit forecast to HK$1.26 billion.
Two applicants say they will invest HK$1 billion each in the first six years
TVB spent this much, in Hong Kong dollars, in the first half of the year, including programming: $1.3b