Essel Group Inks Rs 4,224 Crore-Deal With Invesco Oppenheimer To Sell Stake In Zee Entertainment

Subhash Chandra’s Essel Group agreed to sell stake in Zee Entertainment Enterprises Ltd. to Invesco Oppenheimer, helping promoters of India’s largest broadcaster alleviate the crippling debt situation they’ve faced over the past two years.

Invesco Oppenheimer Developing Markets Fund will acquire up to 11 percent stake in Zee from its promoters for Rs 4,224 crore, according to a stock exchange filing. “The announcement of 11 percent stake sale of ZEEL to the Fund is a strong step in the overall divestment process, giving the promoters the required fillip to initiate the repayment process.”

Oppenheimer Fund already owns 7.74 percent stake in Zee Entertainment as of June, according to filings with the stock exchange. The deal could increase its stake in the broadcaster to over 18 percent. The promoters currently hold 35.79 percent of the company, 64 percent of which is pledged. After the sale, their ownership could fall to below 25 percent.

Depending on the final number of shares acquired by Oppenheimer, the deal price could yield a 10.5 percent or more premium to Wednesday’s closing price of Rs 361 per share. That compares with the Rs 350 the stock was trading at in February when the promoters entered into a standstill agreement with lenders, giving Essel Group eight more months to repay debt.

The sale to Invesco will have no impact on management and strategy of Zee Entertainment, noted Rahul Jain, analyst at Yes Securities. Though he had expected the stake sale to fetch a higher premium “of 16 to 17 percent instead of the current premium of 10.5 percent”.

Along with selling stake in the broadcaster, Essel Group is also in the process of divesting some of its non-media assets, the statement said. “Essel Group is confident to complete the overall process of repayment, well within the agreed timeline.”

The current market scenario makes it difficult to sell the non-media assets of the company, said Dipesh Kashyap, vice president at Equirus Securities. But the management said they have some non-binding agreements, he added.

The Story So Far...

Chandra’s standstill with lenders runs out on Sep. 30, 2019. It was entered into to stall lenders, including several mutual funds and non-banking financial companies, from selling Zee Entertainment shares. These shares, close to 60 percent of the promoter holding, were pledged by Chandra to raise over Rs 13,500 crore in debt. A BloombergQuint investigation had estimated the combined promoter debt to be Rs 17,000 crore. Mutual funds have the biggest exposure to Essel Group at Rs 7,570 crore—the largest being of Aditya Birla Sun Life Mutual Fund, followed by HDFC Mutual Fund, Franklin Templeton Mutual Fund.

A 37 percent fall in Zee Entertainment’s stock price on Jan. 25 would have forced the promoters to increase collateral, sans which a default would have been triggered prompting a fire sale of shares. To prevent that, Chandra convinced lenders to wait till September, giving him time to sell assets, including his stake in Zee Entertainment, and repay them.

The Zee Entertainment stake sale intention was first announced in November. At the time, the promoters, that owned a just over 41.62 percent stake, said were keen to sell up to half of their holding to a strategic partner that would help transform Zee Entertainment into a “global media-tech player”. It has since become clear that the stake sale was more an effort to help repay promoter debt.

Financial Investor Vs Strategic Acquirer

Chandra was said to be in negotiations with several strategic and financial investors, including a consortium that included U.S. cable giant Comcast Corp., James Murdoch’s Lupa Systems and Blackstone Group Inc, as reported by Bloomberg earlier.

But the standstill timeline made it difficult to strike a deal with a strategic player, said Punit Goenka in an conference call with stock analysts on Jul. 31 evening.

Goenka also clarified that:

• The outstanding loan amount against the pledged shares across the Zee group is Rs 11,000 crore. This includes principal, interest and upside sharing with the lenders.
• The tax leakage in this transaction is “minuscule” and a large part of the Rs 4,224 crore amount will come into the hands of the promoters. (Zee’s stock price has declined substantially since long-term capital gains tax kicked in in January 2018.)
• The promoters will have to engage with the lenders to release the shares for the stake sale.

• There will be marginal additional stake that will be sold going forward. It’s only after the sale of non media assets will the promoters know how much more they may need to sell to repay lenders.
• The sale of solar and road assets is in the final stages. The promoters will complete the sale of non-media assets within the next two months.

Essel Group’s promoters need to realise another Rs 6,776 crore via asset sales (shares, projects) before the end of September, as per their standstill agreement with mutual fund and NBFC lenders.