A bird in hand is better than two in the bush. Why is Invesco Oppenheimer ignoring a deal loved by stock markets, and insisting on an extraordinary general meeting (EGM) to oust Zee Entertainment Enterprises Ltd (ZEEL) MD & CEO Punit Goenka and to reconstitute the board?
One immediate reason is a change in Sebi regulation on the appointment of independent directors, which takes effect in January 2022.
According to the new regulation, the appointment, re-appointment and removal of independent directors will require a special resolution, with the number of votes in favour more than three times those against. Currently, regulations require only 50 percent vote share for the same.
Considering the non-binding nature of the ZEEL-Sony deal, Invesco may want to push through the board reconstitution before the new regulation takes effect. “If a deal does not fructify for any reason and time elapses, it may be harder to push through board changes,” said a person familiar with the development.
ZEEL minus Subhash Chandra family
Another reason, and a more important one, is to evaluate other potential suitors for ZEEL, which can be done independently only by a new board. There are other strategic investors who may be interested in buying ZEEL without the Subhash Chandra family in the equation.
“It is like pricing a house with an undesirable tenant versus pricing a house that is vacant,” said a spokesperson of a prominent proxy advisory firm.
There is also concern over an option the Zee family enjoys -- to hike their stake from 4 percent to 20 percent over five years. “If it happens through a QIP or Sony sells down stake, it will be back to square one,” added the proxy advisor.
Foreign fund managers Moneycontrol spoke to feel Sony may have valued ZEEL cheaply in exchange for accommodating the interest of ZEEL promoters.
A simple reverse calculation of the deal with shareholding of 61:39 for ZEEL-Sony without the cash infusion equated with a shareholding ratio of 47:53 plus Rs 1.57 billion cash suggests that the entity was valued at a total value of $5.2 billion (Rs 38,480 crore). Translated, ZEEL was valued at $3.2 billion (Rs 23,680 crore) while Sony was valued at $2 billion (Rs 14,800 crore) for the deal. That pegs ZEEL’s per share price at Rs 246.
Even the additional 2 percent given to ZEEL promoters as compensation for a non-compete clause seems unnecessary, a spokesperson from a proxy advisory firm suggests. This again stems from the fact that the ZEEL promoters’ stake have been diluted significantly, and media is a tough, cash-guzzling business that accommodates only the big players.
ZEEL is a unique asset and one of the strongest media franchises in the country with possibilities for further growth. “It is now an asset play and there is a strong likelihood that even some of the non-media companies may be interested in the deal if there is open bidding,” said a foreign institutional stakeholder.
“When the biggest investor keeps quiet, others cannot do much. But with Invesco taking a firm stand, things can only look up,” he added. With Invesco taking a strong stand against the ZEEL promoters and highlighting governance lapses, the days of the share trading at a cheap valuation may now be over.
Some of the local fund managers, however, aren’t too confident about ZEEL making a better deal than what it has forged. Invesco Oppenheimer and most other shareholders were on the same page when the former sent out its first letter calling for the ouster of Goenka and the reconstitution of the board. But with a deal on the table, other shareholders have shifted loyalties. Their immediate worry seems to be the delay, and the distinct possibility of a court case.
Following Invesco Oppenheimer’s letting requesting the ZEEL board to call for an EGM, the board is obliged to schedule a meeting within 21 days, on a day not later than 45 days from the date of receipt of such requisition, as per law.
In the event the board fails to do so, the meeting may be called and held by the requisitionists themselves within three months from the date of the requisition. Mails sent to Invesco by Moneycontrol remained unanswered.
Another deal would mean more delay, but, that apart, some investors are also worried about how a new management may not play out for shareholders. ZEEL has had governance issues for a while now and there could be more unpleasant surprises in store, which could result in write-offs in future.
A new management would mean the “risk” of an immediate clean-up act instead of having time “to manage it (the rot) smoothly”. With checks and balances in place, Goenka would be a better candidate, not just because of his reputation as a savvy media CEO. He can also ensure continuity and smooth running, they feel.
Too many multinational companies that bought into Indian companies with governance lapses failed to effectively create value in a reasonable time because the ‘clean-up’ consumed a lot of time. After cutting a deal in July 2013, United Spirits went through a tumultuous three years before becoming profitable again.
While the rewards of a better bid seem both plausible and tempting, the potential delays and uncertainties seen to be weighing on stakeholders other than Invesco Oppenheimer. The stock hit a low of Rs 302 and a high of Rs 327 before closing at Rs 319.90 today, significantly higher than the price at which ZEEL has been valued in the Sony deal.Disclaimer: MoneyControl is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.