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    Punit Goenka: Zee's pledged shares to VTB Capital nothing new, was declared as part of the loan in January

    Punit Goenka: Zee's pledged shares to VTB Capital nothing new, was declared as part of the loan in January

    Punit Goenka: Zee's pledged shares to VTB Capital nothing new, was declared as part of the loan in January
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    By Nisha Poddar   IST (Updated)

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    Punit Goenka, the managing director and chief executive officer of Zee Entertainment Enterprises, in an interview with CNBC-TV18 talked about the intricacies of the company's deal with VTB Capital.

    Punit Goenka, the managing director and chief executive officer of Zee Entertainment Enterprises, in an interview with CNBC-TV18 talked about the intricacies of the company's deal with VTB Capital.
    The most recent disclosure by the company has been the talk of the town of VTB Capital getting encumbrance of shares in lieu of loan taken by the promoter group, Essel Group. Can you give me more understanding on how this indirect pledge is different from direct pledge of shares?
    The way this works is that we have pledged with them the shares of the holding company in which these shares reside and therefore, it’s not a direct pledge; it's indirect encumbrance of shares.
    When we talk about indirect encumbrance — the market will definitely see it as one more lender having 10.7 percent of the promoter stake and that will bring down your actual holding in the company to less than 95 percent of 22 percent stake that you own in the company and that could be a little uncertain and unnerving for the shareholders. Can you throw more light on the rights that VTB Capital has of invocation of these pledged shares which is indirect in nature and what is the maturity period that they have at the moment?
    Let me clarify that this loan is nothing new, it has been part of the total loan that was declared by us back in January itself of Rs 13,500 crore and that loan amount today stands at Rs 7,000 crore and both these figures include the VTB debt. The way it is structured is that we have another year for maturity of that loan. We are already in agreement with them that they are not invoking any of these shares and they are going to work with us through the sale process where if we pay them certain amount of money they are even willing to extend this loan for us beyond one year.
    Of course the terms of agreement are between the promoter group as well as VTB Capital but when we talk about the risk factors for any shareholder in the company then at least the covenants or the trigger points because of which they may sell ahead of the maturity period. If you can articulate that?
    As I just mentioned that within the next three months if I am able to conclude part of the sale that we are hoping to do through Zee and the infrastructure assets that we have talked about, if part of those proceeds are paid to VTB, they would automatically extend the loan. So I do not see any breach of covenants happening. As you can see, even today their cover is well above 1X, so I do not think any breach to happen from their side on this facility.
    What part of the amount from the proceeds of stake sales and asset sales will have to go to VTB Capital as part of the agreement as you said?
    We have been negotiating with them on that. We have not come to a precise number yet but it will be very small amount compared to the total loan outstanding.
    Will it be top up or will it be margin cover?
    No. It will actually be a reduction in debt.
    So what it means is that from the proceeds of that 10.7 percent stake, a part of that is sold then a part of the funds will go to VTB Capital?
    Correct. If you remember correctly in the Invesco Oppenheimer deal we had reserved 2 percent of the 11 percent for the VTB transactions and that is what will go to them when the stake sale happens.
    As far as the trigger points for any fire sales are concerned, if at all there is an agreement, if you can elaborate on that because the current situation is such that economic slowdown as well as market volatility has also not helped your stock apart from the uncertainty around the repayment of the lenders. How do you see this in terms of the trigger points that VTB Capital may have because that is something which is causing a little bit of uncertainty in the mind of the investors?
    First and foremost one needs to keep in mind that of the Rs 13,500 crore we have paid almost half of it down to the lenders and that itself has been a significant achievement on our part and the lenders acknowledge that and the proof of the pudding is in them giving me the extension beyond September 30 deadline. The question of breach on account of VTB loan, in my view doesn’t arise because they are well above 1X cover and within the next three months if we are able to solve this problem then they are willing to extent that to us. Let me state here very clearly that over a period of 12-18 months I am confident that we will retain at least half of the 22 percent shareholding as promoters of the company.
    If you can elaborate on that very point. I think this is the first time you are mentioning that you want to retain at least half of your total shareholding. Currently it stands at 22 percent; 2.3 percent is supposed to be to Invesco Oppenheimer as Oppenheimer was part of your transaction. So are you going to retain about 9-10 percent stake despite the entire transaction?
    Absolutely because it is not just Zee stake sale which will go towards the entire debt problem. As you know we have completed 205 MW solar sale with an economic interest of about Rs 1,300 crore which we are expecting within this quarter. We are in active dialogue for another 480 MW of solar that needs to be sold within the next quarter itself. We have binding contracts on multiple road assets of the company which will give us some equity value there as well. So between the infra assets and part of the Zee stake sale, we are expecting to solve this entire problem.
    So that means you are saying that whatever the transaction is, not more than 10 percent of Zee Entertainment shares are going to be sold at least at this point and that’s the plan?
    Correct.
    That gets me to another question that there are two options of raising funds at this point which are financial investors or strategic investors. In the past you have had given enough interest from the types of Sony Entertainment as well as Comcast-led consortium but you have shied away from transacting with them and you chose the financial investor route which also turned out to be piecemeal in nature. Is this transaction, the second tranche of lender repayment going to be also part of financial transaction?
    We have been actively in dialogue with financial partners but off late we have seen some of the strategic investors have also come back and spoken to us. The only question that we have posed to them that we have a 90-day window and if it is something that they are willing to act within, we are willing to negotiate and discuss with them as well.
    But you still have taken six months from your mutual fund investors so if strategic is showing interest, you would be able to transact with them in the next six months?
    At least we need a binding document with them within the next 90 days. Without which we will not be able to extend because I do not want to go to the end of the deadline again just like last time and we want to close this transaction well before that happens.
    In hindsight you feel that the most strategic transaction in nature would have become better because you transacted at Rs 400 per share with your already existing shareholder Invesco Oppenheimer and then you were expecting that that will become the benchmark price and above that you can transact further but neither the sentiment around your stock nor the market has been supportive of that. So in hindsight you think a strategic would have made more sense?
    In hindsight we are all wiser. However, the fact of the matter is that whatever the offers the strategics were making was not even close to the deal that I did with Oppenheimer. So from that perspective, I don’t regret having not made that decision.
    Of course, the stock has not held up as you rightly said but we have sailed through the roughest of seas and I am certain we will hit the shores very soon.
    That is like the promoter optimism that you always highlight in tough times like these as well. Now, if I were to look at it, it is likely to be more financial investor in nature because you want to hold on to 10 percent stake, you have only 10 percent stake on offer and some of the investors may want to probably offload. So do you also have the understanding with your existing shareholders on a strategic sale if at all that were to happen so that you still hold 10 percent?
    There is no written agreement with the shareholders as such with us. I think they have valued our intent and our ability to run this company efficiently and it is one of the most profitable media companies around the world. So from that perspective, I think they will back any decision that we make which they would believe is in the best interest of the business.
    If I look at purely the mergers and acquisitions (M&A) game that happens all across the world, strategics were interested in your company, the way the stock price is right now, are you also at risk of a hostile takeover you think?
    It is unlikely that hostile takeover would happen because keep in mind that my largest shareholders have been backing me till now, therefore, going out there and trying to acquire this shareholding from lenders would still require them to at least have us running the business without which I am pretty sure that the DNA of this company cannot be understood by most people.
    You are sounding pretty confident of that and you also gave me a breakup of your infrastructure asset sale so if you can delve deeper into that and a 10 percent stake sale in Zee Entertainment and the rest of the funds to be raised from your other asset sale, that is the mix that you are looking at at the moment?
    That is right.
    Is Dish TV figuring in this plan at the moment?
    No, not at the moment but we are working on Dish TV as well but nothing that is concrete that I can share.
    Then if we talk about the infra asset sale, Rs 1,300 crore from Adani Green Energy for your solar asset sale, that is likely to come in the next few months or so?
    That is right.
    Alright and the road project for which you have stated that you are going to have – you already have a binding agreement, that along with some of the other solar assets – they are all likely to happen in this particular quarter?
    The roads definitely will happen in this period. We are working towards the balanced solar assets also to get done but until I don’t have the deal, I cannot comment on that but the roads project will definitely happen.
    If I look at the overall picture, Rs 7,000 crore is what you have to repay in the next three months, that is the target you have set for yourself and if I look at the share price of both Zee Entertainment and Dish TV, the promoter shareholding, pledged, unpledged put together, comes to just about Rs 7,000 crore if it doesn’t fall further. So your equity headroom over there is small and on the other hand you are looking at the infra asset sale to recover some fund. How much could be recovered from infra asset sale at this point?
    Let me once again clarify that Rs 7,000 crore number that you talked about is there but as I said earlier if I am able to repay VTB a certain amount of their debt, they will restructure this loan even beyond the one-year under which it will usher. So it is not Rs 7,000 crore that we solve for immediately.
    So Rs 5,000 crore?
    Yes.
    You are comfortable when it comes to Rs 5,000 crore?
    Correct.
    Let us come back to some uncertain bets then. VTB Capital fire sale you are saying right now is not possible. What gives you that confidence if you can reiterate?
    Firstly, the structure that they are under, they cannot sell the shares directly. They have to force us to sell shares. Because we are in a silent period, it is not something that is happening tomorrow and as I said we have been in active dialogue with them and we have a principle handshake with them. If we are able to pay them something, they will restructure and if I know VTB, we have been long-term partners, they have partnered with several protagonists in difficult situations like these and they will value for themselves and they will value for the promoters.
    That is the VTB side. Let us now shift to the mutual funds. Some of the mutual funds have offloaded their stake, the others are holding on at this moment. This time, standstill is it written or is it more verbal in nature?
    If you look at the maturity dates of the mutual funds, they are running — the next maturity date only comes in April next year and the multiple maturity dates extend as far as 2020-2021, so from that perspective, we don’t need a standstill sign of rate but they have all assured us that they are not going to sell, they are going to stand with us and they are going to see this process through so that they realise the entire dues that are there today.
    The only risk factor that I see in this entire process is that the lenders know about your encumbered shares with VTB Capital so it not a new disclosure for them, I have spoken to quite a few of them as well but obviously it is not a standstill which is written and sealed and signed. If they have risk on their head then probably more shares can come to the market or if VTB trigger were to happen then again trigger of share sale may happen that is the only uncertainty you are dealing with right now. So how confident are you of mutual funds positions and right now their cover is much more squeezed because of the stock market movement. So at the moment do you also see that as a risk factor?
    There is always risk factor in all these things but given the interest level that we are seeing coming into the stock especially at the price where it is, I am pretty confident that the lenders will stay with us, see this process. I publicly stated that it is going to be 90 days and not 180 days, so they know my intent, they know the intent when I paid 50 percent of the money back, so from that perspective I think they will support us.
    You also said that some strategic interest has come back, so if you can elaborate on that, some of the companies we have already stated were Comcast-Atairos, consortium as well Sony Entertainment, are any of these in the fray at the moment?
    I cannot comment on the names till I have something concrete to share with you.
    Let us talk about the scenario when it comes to one risk factor that the market has been talking about the high court order in Indiabulls petition — does that also hold any risk to the stake sale?
    Just clarifying that the high court order in India bulls matter relates to Dr Subhash Chandra’s personals assets that too which are unencumbered and therefore that is no risk to any of this processes.
    Talking about the 2.3 percent stake by Oppenheimer which is still pending from the 11 percent stake sale that you had earlier announced, now that was at Rs 400 per share, the last stock price was even below Rs 215 per share, do you think that this transaction will still happen at the earlier negotiated price since it has taken so long?
    I am very confident that Oppenheimer values the company, values the management, they are saying it so publicly, they have lived up to their commitment so far, I see no reason why they will live up to their commitment going forward as well but we are in silent period and only after the silent period can we be reengaged back with them.
    It was an off market transaction since it was at a premium to the stock price. So this, if it were to happen, will also be off-market transaction?
    If it will be a premium to market price it will have to be an off-market transaction.
    Will your now existing shareholding, of course 18 percent has been committed by Invesco Oppenheimer of which 2.3 percent is still remaining, will they be okay with another stake sale at this point if it were with a financial investor at a much lower price than them because they just transacted with you only a few months back?
    Oppenheimer truly values the asset and it is not about the next stake sale price is going to be. When they invested at Rs 400 they invested assuming there would be returns over that Rs 400 and therefore the intrinsic value of the asset is not there. The stock price is a function of the overhang that exists in promoter lending shares. I am pretty confident that the company is chugging along fine, we will beat the market expectations as we have done for many years and the company will come back to its value.
    In how much time do you expect the company to come back to its value?
    I only focus on delivery after that it is up to the markets to reward us.
    As a shareholder of Zee Entertainment is there anything to worry about in the near future?
    As a shareholder of Zee Entertainment your company is very valuable, company is performing very well. The team is completely motivated, they are still delivering on the business as usual and from that perspective they need not worry.
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