Street was hoping for more from ZEE deal, shows it’s not happy

Mumbai: Shares of one of India’s largest media and entertainment companies Zee Entertainment Enterprises (ZEE) fell close to 4 per cent (Rs 347.3) on Thursday as investors were disappointed that the parent opted to sell a stake in the company to a financial investor.

Essel Group sold 11 per cent additional stake to US-based Invesco Oppenheimer Developing Markets Fund for Rs 4,220 crore. The fund already held over 7 per cent stake in the company.

While analysts said that given the tight deadline — September this year — for repayment of debt, it made sense for the company to opt for stake sale to an already existing investor, savvy investors have been keen on cashing in on any appreciation in the company's share price with the entry of a strategic investor.

There are two main reasons for this. First, a strategic investor deal would have brought in higher funds than what the company got through this deal with Oppenheimer.

Second, the Street believed that part of the funds generated from sale of stake to a strategic investor would have come in handy in strengthening the company's presence in a highly competitive India’s streaming platforms segment.

With this deal, it seems that the company’s immediate focus is to secure funds to repay debt and not to improve its foothold in new media platforms. The coming of a financial investor does not offer any clarity on these fronts. In the absence of these factors, the deal has elicited lukewarm response from the Street.

Another aspect that investors have reservations with is the attractiveness of the company’s non-media assets, given their sectoral challenges.

At the group level, as of January 31 this year, Essel has total debt of close Rs 17,174 crore. Of this, Rs 11,466 crore is infra-related debt. This infra-related debt covers three major verticals — power transmission, solar and roads (toll and annuity).

Investors doubt whether the company can generate Rs 20,000 crore by selling these assets. So, it seems the company may sell further stake in Zee Entertainment Enterprises. “With infra asset sale unlikely to close in two months, a further 8-18 per cent stake sale in Zee is likely. While the current deal allays near-term concerns, a further stake sale could expose promoters to the risk of losing control,” said CLSA in a note.

The stake sale to Invesco Oppenheimer Fund reduces 38 per cent of its loan against share obligation of Rs 11,000 crore which the Street perceives as just not enough to allay any concern related to the company’s ability to reduce its pledging considerably. A Citi report points out, “The announced deal is far from sufficient and very different from what was envisaged earlier in the year.”

Analysts believe that in the absence of a strategic investor, there’s not much room for an upside in the company’s stock in the near term. A lot would depend on how the promoters would further secure funds to reduce their remaining pledging obligations.