Overhang On Stock Remains Despite Zee’s Deal With Invesco Oppenheimer, Say Brokerages

Subhash Chandra-led Essel Group’s deal to sell up to 11 percent stake in Zee Entertainment Enterprises Ltd. to Invesco Oppenheimer will offer only temporary reprieve to the media conglomerate, according to most brokerages.

Most analysts said the deal announced is far from sufficient and very different from what was envisaged earlier in the year, adding the overhang on the stock remains. Rahul Jain, analyst at Yes Securities had expected the stake sale to fetch a higher premium “of 16 to 17 percent instead of the current premium of 10.5 percent”.

Zee Entertainment’s stock fell as much as 6.3 percent to Rs 339 apiece, its fourth straight session of decline. It’s down over 24 percent year-to-date.

Here is what brokerages made of the deal.

Axis Capital

• While the deal is a step in the right direction, overhang on the stock remains.
• Promoters will have to complete sale of other assets within the stiff deadline.
• Promoters may have to sell additional stake in Zee to address the possible shortfall.
• Expect the stock to remain sideways over next few months until further clarity emerges on asset sale and shortfall funding.

BofAML

• Market likely to be disappointed with Zee going with a financial investor versus strategic investor.
• This is because Zee management in November 2018 had stated that it needed a global strategic partner to maximize long-term value and transform the company into a global tech player.
• Market would likely await clarity on other non-media deals as over Rs 6,500 crore debt still needs to be repaid before September 2019.

Citi

• The announced deal is far from sufficient and very different from what was envisaged earlier in the year.
• While it could provide the promoters some breathing space with partial repayment of dues and perhaps a relatively better negotiating position for monetisation of group assets, we think that the Goldilocks scenario of a global strategic partner is almost ruled out.

CLSA

• The current transaction with Oppenheimer should allay near-term concerns over the sale of pledged shares by lenders.
• It also establishes a transaction price for further stake sales in Zee.
• However, it does expose promoters to risks of losing control over Zee.
• A stake sale in Dish TV and/or further stake sale in Zee Entertainment will be key to further debt repayment.

Credit Suisse

• Believe Zee’s minority investors would have preferred a financial or strategic investor with some additional rights given the balance sheet issues that have cropped up in the last couple of quarters. The deal addresses only part of the promoter debt problems.
• For the around Rs 7,000 crore of promoter debt outstanding after this transaction, if one were to look at the value of residual promoter stake in Zee and Dish TV, there would be a collateral of around Rs 12,000 crore, thus providing some comfort to the lenders.

Emkay

• The deal comes with no lock-in period and the transaction only partially removes the pledge overhang.
• However, the risk of a majority stake sale resulting in a cessation of Punit Goenka-led management team has also gone away. Deal is only a half measure and does not remove overhang fully.

HSBC

• Transaction should help promoters to pare debt but the possibility of getting a strategic investor on board looks bleak.
• Assuming no strategic investor emerges that could help Zee in its digital foray, Zee would have to take the lead on its own.

JPMorgan

Though this transaction provides some breathing space to the Essel Group promoters, it doesn’t entirely resolve the group level debt issue. In our view, certain key issues will weigh on investor sentiment.

• Lack of strategic investors agreeing to buy substantial stake as was being earlier anticipated.
• Promoter group leverage continues to be high and sale of non-media assets will be key to watch.
• Continued overhang of additional stake sale in Zee, contingent on sale of non-media assets at adequate valuations.

Macquarie

• While retention of management and higher stake to a marquee investor are positives, prolonged uncertainty is a negative.
• Any delay in consummation of the infra deals could result in a further significant promoter stake sale. This is a key near-term overhang.
• Expect Zee to trade below fair value until timely repayment of the entire Rs 11,400 crore loan against shares.
• Downgrade stock to ‘Neutral’ with target of Rs 390 from Rs 540.

Morgan Stanley

• The 11 percent stake sale to Invesco Oppenheimer meets 38 percent of the total promoter debt obligation.
• The balance needs to be met through sale of non-media assets, else a further stake in Zee may need to be sold.
• See this as a first step of many, but it doesn't remove the overhang on the stock yet.
• Hence, until the entire debt issue is sorted, the stock could trade between Rs 400—the deal price with Oppenheimer and our bear case scenario value of Rs 245.

Nomura

• While this deal addresses concerns over promoter loans pledged against Zee shares to some extent, sale of remaining assets remains critical for investor confidence and will likely be monitored closely.
• Believe further re-rating will also depend on improvement in the working capital.