Event update: Zee Entertainment (Outperformer) - Resolving promoter group debt issues key to stock price movement…

Event

Zee Entertainment Enterprises’ (Z) shares fell sharply on Friday as pledged shares were sold in the market and Z accepted that their promoter, the Essel Group, is in default on all covenants for loans against Z’s shares (62% of promoter holding was pledged). This was accentuated by an article in The Wire that alleged links between the Essel Group and a company which the SFIO (Serious Fraud Investigations Office) is investigating for high deposits during demonetization.

Over the past three days, Z has issued multiple clarifications and conducted couple of conference calls to update investors about the course of action that they are taking to assuage all concerns. Following are the key steps:

• The Essel Group has met all lenders over the weekend and they have entered into a written agreement with 97% of them (by value of LAS) that no further pledged shares will be sold and the lenders have agreed to give time to the Essel Group to sell stake in Z so that it can repay the lenders. Time period is more than 90 days.
• Promoters highlighted that the interest of both minority shareholders and lenders would be kept in mind during the stake sale and hinted that they are open to selling the entire promoter stake, if the need be.
• Promoters continue to believe that the intrinsic value of Z is intact and they continue to have negotiating power as there are multiple suitors.

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While Z continues its strong run at viewership market share (>20% ex-sports), the liquidity crunch at the group level has led to an unprecedented fall in its stock price. We continue to believe that some strategic partner will find Z a unique asset given its high market share in such a competitive TV Broadcast market; moreover such opportunities come rarely. Promoters were proactive enough over the weekend to sort the immediate concerns (on pledged shares) and this should assuage some investor concerns; however, the key to stock price performance is their ability to find a strategic partner soon. As of now we do not think that the group level concerns will have any impact on the day to day functioning of Z and hence we maintain our earnings estimate and Outperformer rating on the stock.