The managing of Zee Entertainment Enterprises (Zee) on January 28 stated it has reached an agreement with creditors to ensure no additional invocation of promoters’ pledged shares. Zee stock had dropped 27 percent on January 25 as the creditors invoked pledge on 0.6 percent of promoter stocks following a default.
Zee also said last week it will initiate legal actions against a press entity which alleged the Essel group was associated with Nityank Infrapower which has been probed by Serious Frauds Investigation Office (SFIO) to get demonetization deposits of over Rs 3,000 crore.
But it is important to be aware that the allegation is against the group and not right against Zee Entertainment. The larger concern for investors is that the promoters pledge on shares rather than the media allegations. Our focus is on the latest announcement on stocks that are pledged.
Incidentally, Zee Entertainment’s promoters have vowed a massive chunk of their holding in Zee Entertainment to increase funds for group things. Essel group, promoters of Zee, have vowed around 59 percent of their 41.6 percent ownership in Zee to borrowers.
Approximately 96-97 percentage of the lenders by security value of Zee’s shares consisting of MFs, NBFCs and banks have entered into a written agreement. The management stated the agreement extends beyond April, without specifying a deadline.
The news has brought relief to the sinking inventory placing on hold. On the other hand, the service may be temporary. We believe investors must look to exit the counter as headwinds persist in the long run.
Business principles intact
Zee’s business operation remains on a strong footing with healthy growth in subscription and advertisement revenue. ZEE5, the broadcaster’s over-the-top (OTT) platform was launched in February this past year, proceeds growth trajectory with 56.3 million monthly active users and a mean watch time of 31 minutes a day. Most importantly, despite ongoing heavy investment in ZEE5, management is confident of maintaining EBITDA margin.
Valuation has turned attractive
With a sharp correction in stock price last week, evaluation has turned comparatively attractive using the stock trading at around 16 times FY20 estimated earnings, more than a 40 percent reduction to its 10-year average price to earnings (P/E) multiple.
But impending promoter stake sale to weigh on stock’s performance
In an interesting development, Essel group had in November 2018 announced its intention to sell up to 50 percent of its equity stake of around 41.6 percent (which now stands reduced to 41 percent post-invocation of assurance) to a strategic partner by March- April 2019, most likely a top global player.
We had expressed our skepticism over the stake sale directly after the November announcement, and ahead by some agents of stock downgrades. A sale to a global giant will help Zee fortify its OTT platform and expand its offerings. That was the argument after promoter stake sale in November’s statement. The events which have unfolded over the weekend indicates. Promoter stake sale appears more for survival than for expansion.
Even if there is a good outcome of the bet sale in the near term, we do not see material advantages for your company or minority shareholders for two reasons: First, since promoters is seeking to market approximately 20-21% equity stake (50 percent of the entire holdings), it is unlikely to activate an open offer. Secondly, by selling the stake, promoters will get the get nothing and money will stream to the company. Though this is favorable for equity investors in the long run as it can help promoter service the debt and/or part release the pledge shares, it will not materially change the broadcaster’s principles or equip it.
Nevertheless, bet sale to a company especially a global participant can provide impetus to the prospective plan of Zee. Also, getting any strategic investors (can be a massive telecom giant) can considerably uplift the beaten-down stock. But that is hoping to gaze a crystal ball. Purchasing is all about taking calculated risks.
With the bargaining power considerably reduced after the recent events of group, problem or any delay in selling equity stake could create additional pressure. Regardless of the correction downside risks persist in form of competition from OTT players and tariff order impacting subscription revenues for Zee.
Even the promoter stake sale will definitely be positive for debt holders of the Essel group but not necessarily for minority equity holders of Zee Entertainment. Hence, investors will need to tread cautiously and use any cost rise to exit the counter.