Event update: Zee Entertainment (Outperformer) - Beginning of the end of promoter debt issues?

Event

Zee Entertainment (Zee) promoters are selling 11% stake in the company, to Invesco Oppenheimer Developing Markets Fund, for Rs42.24bn (valuing the stock at Rs400/share, ~11% premium to today’s closing price) to pare down promoter level debt.

Key highlights from the call (other details inside)

Promoters confirmed that promoter level debt (mostly loan against shares across group companies, including Zee) stood at Rs110bn, as of today. They are in advanced stages of selling other media and non-media assets (Roads, Solar) and promoters are confident of repaying the entire promoter level debt by the end of September 2019 (within stimulated timeline). If there is any shortfall, even after selling the aforementioned assets, promoters are ready to sell some more stake in Zee to ensure that they deleverage themselves, as that is their priority. Promoters said that the tax outgo in the deal will not be meaningful.

Our view

Post this sale, promoter shareholding would come down to 24.8% (from 35.8%), in Zee. We believe the loan against shares towards Zee Entertainment is in the range of Rs70-75bn (out of the total Rs110bn). In the worst case scenario, Zee promoters would have to pare down another 7-8% stake in Zee and still be left with ~17-18% residual stake in the company, enough to exude control (PVR promoters have had ~20% stake since March 2017). We believe, Mr. Punit Goenka, is the only person who can run such a tight cost ship (average margin of 29% over the past 5 years despite heavy investment in Broadcast, Digital, Music and Movies) and still ensure gain in viewership/revenue market-share. He staying on is a welcome development, in our view.

As they say, ‘to err is human’ and Zee promoters did err; but they are atoning for it by parting (partly) with their crown jewel. This does not absolve them of the missteps but should make them more responsible, in our view. By no means the cash flow profile of the business will improve over the next two years (we are in a content ‘land grab’ phase as India is witnessing its own ‘streaming wars’), but then such a moat (~20% market-share of India’s TV entertainment market), would not be available at such distress valuations (60% discount to 1 year forward PER of last five years); but for such shock events. We retain our OP call and price target. The key risk to our call is promoters inability to pare down debt and also not retain control.