No immediate relief in sight for Zee Entertainment, stock falls over 4%

After the latest transaction, the promoter group still needs to pay about ~6,800 crore through the sale of road and solar assets, or a stake sale in Dish TV
The stock of Zee Entertainment Enterprises (ZEEL) declined by 4 per cent on Thursday, despite a stake sale by the company’s promoters. The promoter pledge and stake sale were key overhangs for the stock, but the announcement of the deal failed to trigger a rally.

Including Thursday’s loss, the stock has shed over a third of its value over the past one year.

While the Rs 4,200-crore deal with Invesco Oppenheimer — for a 11 per cent stake in ZEEL — does allay near-term concerns, brokerages say it is not enough to repay Rs 11,000 crore in outstanding loans against shares of all listed entities of the group.

Parag Gupta and Sulabh Govila of Morgan Stanley say the stake sale meets 38 per cent of the promoter debt obligation. The balance needs to be met through sale of non-media assets, failing which a further stake in Zee may need to be sold. They believe this is the first of many steps, but it doesn’t remove the overhang on the stock yet.

Further, the deal was done at a 10.6 per cent premium to the closing price on Wednesday, whereas the Street was expecting a premium of 15-20 per cent. The other expectation was the best-case scenario of getting a strategic investor on board, which did not happen.

The management indicated that the need to close the deal by the end of July prevented them from exploring the option to scout for a strategic investor. Analysts at ICICI Securities say that the stake sale to a global technology/media player could have added value in expanding its digital reach, and the failure to do so has dampened sentiment.

The biggest worry for the Street, however, is the need for further dilution in ZEEL and a possible change in management. After the latest transaction, the promoter group still needs to pay about Rs 6,800 crore through the sale of road and solar assets, or a stake sale in Dish TV.

Given that the current market capitalisation of Dish TV (the stock fell over 6 per cent in trade on Thursday) is close to Rs 4,700 crore, a 57.5 per cent stake will fetch the promoters close to Rs 2,700 crore. This is close to 24.5 per cent of the promoter debt.

The equity value of the infrastructure assets could range from Rs 8,000-9,000 crore. However, given that the process of selling the assets has been going on for quite some time, analysts believe that monetisation of the same is unlikely to take place before the September deadline.

Deepti Chaturvedi and Akshat Agarwal of CLSA believe that the chance of an asset sale closing in two months is bleak, and a further 8-18 per cent stake sale in ZEEL is a likely outcome.

The current stake of promoters, following the recent deal, stands reduced at 25 per cent. If there is further dilution, the promoters could end up being minority shareholders, putting the continuation of the current management in doubt.

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