Neha Dave
Moneycontrol Research
Highlights
- Zee Entertainment Enterprises promoters strike an agreement with lenders
- Pledged shares of Zee will not be invoked till some time as a part of a deal
- This is a near term positive, but all eyes on impending stake sale by promoter
- Valuation has turned enticing but multiple headwinds exist- Investors should look to exit on all up moves
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The management of Zee Entertainment Enterprises (Zee) on January 28 said it has reached an understanding with lenders to ensure no further invocation of promoters' pledged shares. Zee stock had plunged 27 percent on January 25 as the lenders invoked pledge on 0.6 percent of promoter shares following a default.
Zee also said last week it will initiate legal action against a media entity that alleged the Essel group was associated with Nityank Infrapower which is being probed by Serious Frauds Investigation Office (SFIO) for demonetisation deposits of over Rs 3,000 crore.
However, it is important to note the allegation is against the group and not directly against Zee Entertainment. The bigger concern for investors is the promoters pledge on shares and not the media allegations. Hence, our focus is on the latest announcement on pledged shares.
Incidentally, the promoters of Zee Entertainment have pledged a large chunk of their holding in Zee Entertainment to raise funds for group entities. Essel group, promoters of Zee, have pledged around 59 percent of their 41.6 percent ownership in Zee to group lenders.
Around 96-97 percent of the lenders by collateral value of Zee’s shares consisting of MFs, NBFCs and banks have entered into a time-bound written agreement. Without specifying a deadline the management said the agreement extends beyond April.
The news has brought relief to the sinking stock putting on hold further selling by lenders. However, the support may be temporary. As multiple headwinds persist in the near term, we believe investors should look to exit the counter on any rally.
Business fundamentals intact
Zee’s business operation remains on a strong footing with healthy growth in advertisement and subscription revenue. ZEE5, the broadcaster’s over-the-top (OTT) platform was launched in February last year, continues growth trajectory with 56.3 million monthly active users and an average watch time of 31 minutes a day. Above all, despite continued heavy investment in ZEE5, management is confident of maintaining EBITDA margin above 30 percent in the near term.
Valuation has turned enticing
With a sharp correction in stock price last week, valuation has turned relatively attractive with the stock trading at around 16 times FY20 estimated earnings, more than a 40 percent discount 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 pledge) to a strategic partner by March- April 2019, most likely a top global player.
We had expressed our scepticism over the intended stake sale right after the November announcement, and much ahead of stock downgrades by some brokers. (Read: Is promoter stake sale in Zee for survival or growth?
A strategic sale to a global giant will help Zee expand its international offerings and strengthen its OTT platform. That was the often heard argument after the announcement of promoter’s intended stake sale in November. The events that have unfolded over the weekend indicates otherwise. Promoter’s intended stake sale seems more for survival than for growth.
Even if there is a positive outcome of the stake sale in the near term, we do not see material benefits for the company or minority shareholders for two reasons: First, since promoters is looking to sell around 20-21 percent equity stake (50 percent of their total holdings), it is unlikely to trigger an open offer. Second, by selling the stake, promoters will get the get cash and nothing will flow to the company. Though this is positive for equity investors in the near term as it can help promoter service the debt and/or part release the pledge shares, it will not materially alter the broadcaster’s fundamentals or equip it for higher investments.
That said, stake sale to a large company especially a global player can provide impetus to Zee’s future plan. Also, getting any strategic investors (could be a large telecom giant) can significantly uplift the beaten-down stock. But that’s trying to gaze a crystal ball. Investing is all about taking calculated risks.
With Essel group’s bargaining power significantly reduced after the recent events, any delay or difficulty in selling equity stake could create further pressure on the stock price. Despite the correction, multiple downside risks persist for Zee in form of increasing competition from OTT players and new tariff order adversely impacting subscription revenues.
The promoter stake sale will undoubtedly be positive for debt holders of the Essel group but not necessarily for minority equity holders of Zee Entertainment. Hence, investors need to tread cautiously and use any price rise to exit the counter.
Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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