Zee Entertainment reported strong earnings growth for the period ended June 30, 2019, and the management sounded confident that a deal is coming as soon as July end. But a few questions remained unanswered for the investors. However, Zee's stock price rallied 5 percent post
The company reported strong subscription revenue growth of 47 percent in the June quarter but ad revenue growth remained lacklustre due to the weak market scenario, several sports events which took place in last quarter and impact of TRAI new tariff order. The company's profit grew as other income doubled to Rs 104 crore in the same quarter last year.
The Street was anticipating an update on ongoing promoter stake sale talks but nothing was provided in the press release. However, in the earnings conference call and to CNBC-TV18, CEO Punit Goenka clearly indicated that Zee Entertainment's stake sale will be announced by July-end.
"We have one binding offer and will receive another one in a couple of days. On receiving the second offer, the family will discuss and decide which option to go with. One offer is from pure financial investor and other is from strategic/financial investor," said Goenka.
Zee Entertainment is a cash-rich business for the Essel group. And while this might look like good tidings, you may want to pause before rushing in to buy the stock. Some important questions still remain unanswered. Let’s consider them.
What if the promoters sell just 50 percent of their stake?
With the fall in promoter’s stake value, chances of selling stake beyond 50 percent rise and the Street will watch out closely. If promoters manage to sale 50 percent at current market cap then they will be able to receive around Rs 6,736 crore, which actually covers only 40 percent of the total borrowings.
If the promoters' stakes are sold at a 30 percent premium, 51 percent will be covered. Although the promoters are also monetizing their infra assets to settle debts. So overhang still continues for promoter level debt. The promoters holding had fallen to 35.7 percent as of June 30, compared to 41.6 percent in December 2018. In case the promoters decide to sell most of their stake?
To cover the maximum debt amount, if the promoters go beyond 50 percent stake sale, the question of controlling interest arises. If it a strategic investor, perhaps chances of controlling interest may go away from the current management team, and if it is a financial investor like PE fund, the current management may continue for a short term.
It is important to have the company's control with the current management to deal with the disruptions happening in the broadcasting industry. New management may take time to get a grip on the business, and may also strategically change the future direction of the business. Any such developments will require a re-assessment of the company’s prospects.
Currently, the stock is trading at 16 times FY21x, which is a 30 percent discount to its historical valuations. It will be important to premium at which deal to take place. Lower valuations can lead to a higher shortfall for promoters in meeting their obligation and extend the overhang. Also, the price will have a bearing on investor perception of the true value of the business.
Will there be an open offer?
Open offer triggers when 25 percent or above stake is sold. So if the stake sale is of 50 perecnt or more of the promoter holding, this will become necessary. The participation ratio in any such offer will become important for shareholders.
All the above questions remained answered in the earnings conference call and in the TV interview. On business, management guided 25 percent growth in subscription revenues, ad revenues to pick up once headed to the festive season and low double-digit topline growth in FY20.