Zee To Invest Rs 522 Crore In Content Delivery Arm Sugarbox

Zee Entertainment Enterprises Ltd. will invest Rs 522 crore in its online content delivery subsidiary over the next two years.

The broadcaster will infuse Rs 300 crore for capital expenditure and Rs 222 crore for royalty and operating expenditure of Margo Networks Pvt. Ltd., according to the management. Punit Goenka, managing editor and chief executive officer, said in the investor call, “This will benefit the company by offering an ecosystem play and contributing to its broader digital strategy.”

Margo Networks operates Sugarbox, which enables seamless access to mobile apps even in places with bad or no network and has tied up with the railways. The company said a user of Sugarbox will be able to stream Zee5 videos, listen to Zee Music, play games, learn on-the-go, shop online, order food and book travel. The investment will contribute to the growth of the entire digital ecosystem of Zee Entertainment, expanding presence beyond streaming and advertising technology.

Motilal Oswal said a venture capital or a private equity investment could have helped save cash and still provided similar benefits given that this deal doesn’t provide any exclusive rights. And it comes when the company’s cash flow turned negative in the first half of 2019-20.

Shares of Zee Entertainment tumbled as much as 14 percent after the announcement on Monday and closed 8.44 percent lower compared with a 1.3 percent decline in the benchmark Nifty 50.

The broadcaster acquired an 80 percent stake in Sugarbox in April 2017. The board has now agreed to extend financial and operational support, including providing performance and corporate guarantees. But the company didn’t disclose details of additional stake Zee Entertainment will get after the investment.

Though SugarBox is a related party, the management said none of the promoters or their firms has an interest in it. Two directors of Zee Entertainment had resigned in November citing concerns over related-party transactions.

Other Key Highlights

• Sugarbox expects to achieve breakeven in four years and would start generating operating income from year five.
• The management expects a healthy internal rate of return over 10 years
• Sugarbox is expected to cater to 6,500-7,000 people initially, generating Rs 10-12 per user a month and a peak revenue of Rs 12-15 a month.
• Zee Entertainment trades at 6.2 times and 3.3 times its estimated earnings and enterprise value-to-Ebitda for FY22, making it look attractive. But Motilal Oswal said the upside may be capped given the weak advertising environment, bloating balance sheet and unrelated investments.