Succeeds in buying time from lenders
Lenders have offered a 90-day period to Zee Entertainment ([ZEE] or Z IN) to close a deal with a strategic partner; until this, they would not invoke the pledged shares. Almost 97% (value terms) of lenders have agreed to the terms and talks are ongoing with the rest. A unanimous agreement has been reached, largely due to collateral pledged by ZEE as well as lenders’ confidence on its intrinsic value.
What is in ZEE’s favor
Some key triggers include:
1) Tie-up with a global (MNC) strategic partner for a partial stake,
2) To belief in the company’s strong fundamentals, with industry-leading growth rates,
3) Huge content library, which can be valued separately from the broadcasting business, and
4) An efficient distribution model for ZEE5, helped by the global partner.
What works against ZEE
Some key risks include:
1) The sale of the entire promoter stake to a domestic or global firm, which will hamper medium-term growth rates, given the promoter’s expertise in the regional genre,
2) Cultural challenges emerging post the entry of a new partner, which may see senior-level exits,
3) Profitability being negatively affected with the partner’s new strategy, which may lead to a de-rating, and
4) ZEE’s inability to find a partner within three months based on the average price of the past six months (INR 465).
Valuation: revise to Buy with a new TP of INR 490
We are still in favor of promoters selling partial stake and staying back with the partner, as no other promoter group may be able to replicate ZEE’s success in regional genres with good profitability. However, given the current situation of promoters being in a rush to sell the stake to service group-level debt requirements, there might be a case wherein the entire stake is sold to the partner. Further, there is low likelihood of a global strategic partner coming in, as the management was not in advanced stage talks with any of the potential investors, before the lenders invoked shares this Friday; we believe that due diligence with a global partner may require much more time. We expect price performance to remain with a positive bias in anticipation of an open offer for stake sale, selling pressure evading, as lenders hold on to their positions and fundamental business valuation turns inexpensive currently (trading at 16x FY20E P/E). We believe medium- to longer-term performance still depends on the strategic partner deal structure, which is still uncertain. We revise to Buy from Accumulate citing inexpensive valuations, with a new TP of INR 490 from INR 535 on 23x (from 25x) FY20E P/E — a slightly lower multiple after factoring in the uncertainty. Our earnings estimates remain unchanged.
Karan Taurani @ Elara Capital