A TV network earns Rs 900 crore from advertising, falling 8% a year, and Rs 400 crore from subscriptions, rising 6%, with 40% of its costs fixed. Project five years of EBITDA and say whether it is a buyout at 6x.

EBITDA falls from Rs 260 crore to Rs 171 crore by year 5, and at 6.0x the network is not a buyout. The price is Rs 1,560 crore. Five years of after-tax cash come to about Rs 636 crore and an exit at 4.0x adds Rs 683 crore, Rs 1,319 crore in all, so the business does not repay its own price. At about 3.0x it would earn 15% before any leverage.

Think of a newspaper that sells copies and sells advertising: readers drift away slowly, advertisers leave faster, and the presses cost the same either way. Advertising shrinks from Rs 900 crore to Rs 593 crore while subscription grows from Rs 400 crore to Rs 535 crore, and subscription does not overtake advertising until about year 5.7, just after the hold ends. Total revenue falls from Rs 1,300 crore to Rs 1,128 crore, a 13% decline, which sounds survivable until you put the costs under it.

Because the fixed Rs 416 crore does not shrink. Variable cost is 48% of revenue, so each rupee of lost revenue saves 48 paise of cost and loses 52 paise of EBITDA. That is operating leverageThe degree to which profit moves more than revenue because part of the cost base does not change with sales. working in reverse. Revenue falls 13% and EBITDA falls 34%, with the margin sliding from 20% to 15%.

Test the one thing a declining business must do: repay its price before it fades. At 6.0x the price is Rs 1,560 crore; five years of cash return Rs 636 crore and an exit at 4.0x of Rs 171 crore adds Rs 683 crore, Rs 1,319 crore in all, less than was paid. The unlevered return is negative, about -4% a year, and debt would make the equity return worse, not better. For the price to earn 15% unlevered it would need to be about Rs 777 crore, 3.0x today's EBITDA, and even that assumes a buyer at 4.0x exists in year 5.

The fixed cost. If a sponsor could cut the Rs 416 crore of fixed cost by a quarter, year 5 EBITDA rises by about Rs 104 crore, and the whole case changes; the question is whether studios and transmission contracts actually bend. The other lever is the subscription line: if carriage fees can be repriced faster than 6%, subscription overtakes advertising inside the hold and the floor under EBITDA rises. Say which you would diligence first and what evidence would move you, because the interviewer wants to hear that a declining business is bought on cost and cash, never on hope about the top line.