Invesco suggested ZEE’s merger with strategic group, undervalued ZEE: Punit Goenka

Two of the largest investors of Zee Entertainment Enterprises Ltd (ZEEL) – Invesco Developing Markets Fund and OFI Global China Fund LLC – had presented a deal to Punit Goenka in February 2021, involving the merger of ZEEL and certain entities owned by a large Indian group (Strategic Group). This was stated by the ZEE MD and CEO in a letter address to the ZEE Board. According to Goenka’s letter, Aroon Balani and Bhavtosh Vajpayee, representatives of Invesco, had presented the deal.

Goenka’s letter comes amid the power struggle between the owners of ZEE and Invesco.

In his letter to the ZEE Board, Goenka mentioned that he had expressed his apprehension to Invesco that as the merging entities of the Strategic Group were over-valued and would result in a loss to the stakeholders of the company.

In response, Invesco told Goenka that the valuations of the entities belonging to the Strategic Group had been unilaterally “agreed” by Invesco and there was no room for further negotiations on the commercial terms of the deal and no data would be forthcoming to diligence and verify the valuation being attributed to the entities belonging to the Strategic Group.

The company’s management team informed the ZEE Board that in their considered view, the valuation attributed to the entities belonging to the Strategic Group could have been inflated by at least Rs 10,000 crore. This would mean that if the proposed deal would have been approved, the shareholders of the company would have suffered a loss of at least Rs 10,000 crore.

Meanwhile, as per the proposed merger presented by Invesco, Goenka would continue as the MD and CEO of the merged entity.

Goenka, in his letter to the ZEE Board, also informed that when he expressed governance concerns in relation to the deal (especially surrounding the valuation gaps in the merging entities of the Strategic Group), he was informed by Invesco that the deal would be consummated with or without him.

An analyst’s view

Elara Capital, while analysing the latest development, said that the ZEE Board’s release indicates that the strategic group had overvalued its own company’s stock and undervalued Zee Entertainment stock at around Rs 22,000 crore, valuation which is a low multiple of 12.9x. “We believe ZEE as a franchise deserves a valuation multiple of at least 15-16x, despite TV business seeing converging growth rates,” Elara Capital opined.

While the ‘strategic group’ has not been named, Elara Capital believed that there is a high likelihood that this group is TV18. It stated, “We believe there will be very little synergies with TV18 if the deal were to happen with or without Mr Goenka; we continue to believe that merger with Sony is the most ideal situation for a company like ZEE.” While Elara Capital did not expect any significant re-rating if ZEE is merged with TV18, on the other hand, it felt that, “It will be a win-win for TV18 as the company will have a 60% stake in the merged entity (with TV18 valuation being pegged at approx 35x one year fwd PER, which we, too, believe is highly overvalued).”

Elara Capital reiterated that the mention of TV18 is only an assumption.