Event update: Zee Entertainment (Outperformer) - To get global strategic partner by divesting promoter stake; panacea for all ills?

Event

In a rather surprising and unexpected move, Zee Entertainment Enterprises Ltd. (Z) has informed the exchanges that its promoters (including promoter group companies) are exploring a possible sale/divestment of up to 50% of their holding in the company (current promoter holding at ~42%) to a “global strategic partner”. The promoters intend to raise funds to transform Z into a tech-media company. As per them, this transaction “is expected to address the Essel Group's capital allocation priorities” and will allow Z’s shareholders to “capture the full value” of the company. Essel, Z’s promoter group, expects this “strategic review” to be concluded by March/April 2019.

Our view

In our recent interactions with investors, many have raised the concern that Z’s promoter entities are highly leveraged (esp. in their infra arm) and Z’s stock has been pledged (~59% of promoter stake is pledged) to address liquidity constraints across the promoter group.

As a result, an up to 50% divestment of promoter holding may be construed, by many, as if it is being done to resolve these issues. Nonetheless, we believe on-boarding a “global strategic partner“ is a medium to long-term positive as eventual winners in the media space will not be traditional media companies but companies which have a strong blend of technology and content creation capabilities. A ‘global strategic partner’ would bring in the technological edge required for distribution and discovery of content while Z would continue to create great relevant content thus making Z future proof and giving it a play in the increasingly uncertain but exciting future of digital media industry. While it is difficult to speculate as to whom the stake could be divested, but we believe that the best outcome would be if Z is able to get one of the FAANG constituents or Time Warner/Comcast on board.

A global strategic partner on the Board of Z would lead to improved corporate governance, as well. At CMP, promoters will be able to raise Rs88.4bn (assuming they divest 21% of their holding in Z), this should reduce the overhang of pledged shares along with addressing any liquidity issues that they might be facing in their other businesses.

Some might believe that promoter paring down stake to ~21% could mean that they do not see much potential in this business. We do not think so (PVR promoters own 20.3% in PVR and are highly committed) but the best way to do this would have been to let the money come inside the company so that a cash war chest is created to fight the digital wars.

We currently maintain our Outperformer rating on Z and would eagerly await the outcome of this strategic review.