Why Zee Is Paying Cash To Buy Its Own Film Division
Zee Entertainment channels. (Source: BloombergQuint)

Why Zee Is Paying Cash To Buy Its Own Film Division

Zee Entertainment Enterprises Ltd. will pay its wholly owned subsidiary cash to buy a division. The money will then find its way back to the broadcaster as the subsidiary will redeem bonds issued to the parent.

The broadcaster will pay Zee Studio Ltd. (erstwhile Essel Vision Productions Ltd., a 100% subsidiary) Rs 275 crore to acquire its film production and distribution business through slump sale (as a whole without assigning value to assets), the company said in an exchange filing on Thursday. It expects the sale to be completed in two months.

The transaction has the approval of the board and though it’s a related party transaction, because it is with a wholly owned subsidiary it does not require any shareholder approval.

To be sure, the law doesn’t disallow such transactions. Yet, paying cash to a subsidiary for a division that’s already consolidated in the buyer’s balance sheet is unusual. More so as Zee has not offered any clear public explanation for the transaction or use of cash by the subsidiary.

The acquisition has been done to achieve operational efficiencies, to simplify the overall structure and is in line with the company’s growth strategy, Zee Entertainment spokesperson said in an emailed response to BloombergQuint's queries. The film production and distribution business will be acquired at a book value of Rs 275 crore, subject to working capital adjustments on the date of transfer.

The acquired business division has a strong movie library (under production), which will be transferred to the parent as part of the deal, said the spokesperson, without elaborating on the size of the library.

The business division in question did a revenue of Rs 124 crore in fiscal 2019-20, lower than the Rs 299 crore in FY19 and Rs 166 crore in FY18.

While the transaction value is relatively small compared to Zee Entertainment's size and may not have a material impact on the consolidated financial statements, cash is flowing from the holding company to a wholly owned subsidiary, said Hetal Dalal, president and chief operating officer at Institutional Investors Advisory Services.

The rationale for this remains unclear, and investors are one step removed in terms of access to cash flow. Transactions of such nature do not inspire investor confidence. The company will do well to clarify to its investors how the subsidiary proposes to use the cash.
Hetal Dalal, COO, Institutional Investors Advisory Services

Zee Studios

It is one of the largest subsidiaries of Zee. In the year ended March 2020:

  • Revenue from operations stood at Rs 467.3 crore—excluding other income of Rs 154.30 crore and profit after tax of Rs 155.30 crore.
  • The company has assets worth Rs 719.20 crore and liabilities of Rs 569 crore.
  • Assets include inventories of Rs 324.97 crore and borrowings of Rs 280.37 crore.
  • The company has cash and cash equivalent of Rs 2.2 crore at the end of March 2020.

Why Is Zee Buying Its Own Business?

Debenture Redemption

While Zee made no public disclosure about this, BloombergQuint found that the cash received by Zee Studios will be used to partially redeem optionally convertible debentures (OCDs) issued to parent Zee Entertainment. The company spokesperson confirmed this in response to BloombergQuint’s queries.

Zee Studios had raised an unsecured loan of Rs 522.36 crore in 2019 from Zee Entertainment by issuing of 522.36 crore 0% OCDs of Re 1 each.

The fair value of these financial instruments declined Rs 150 crore by March 2020 to Rs 439.52 crore, according to the balance sheet of Zee Studios. Adjusted for current liabilities, the outstanding value of these OCDs stood at Rs 280.14 crore at the end of March.

Zee had the option to convert or redeem Series-I of the OCDs worth Rs 167 crore as on Sept. 10. As per the terms, they were to be converted at a price of Rs 30 apiece or redeemed. Zee will be redeeming these OCDs.

The remaining set of OCDs worth Rs 161 crore and Rs 194.36 crore are to be redeemed In February and November 2022.

The film business acquisition will reduce the OCDs payable by the subsidiary to the (parent) company, said the company spokesperson.

In a nutshell, Zee is acquiring a business it already owns, albeit indirectly via a wholly owned subsidiary, so that the subsidiary can repay the loan it took from its parent.

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