Pressure on Zee Entertainment stock amid stake sale by promoters

Deal structure, choice of partner coming into the company are key factors

The stock of Zee Entertainment shed 8 per cent on concerns regarding the stake sale by promoters, rising competition, higher investments in the over-the-top (OTT) application segment, and near-term pressure on subscription revenues. While analysts believe the near-term earnings growth is expected to be strong, the uncertainty around the kind of strategic investor, quantum of stake sale and deal structure, is leading to pressure on the stock.
 
An analyst at a domestic brokerage believes a minority stake sale, especially to a financial investor, may not help as funds will go to the promoters rather than to the company.
 
The management has clarified that they are looking at a strategic investor with strong technology and distribution capability, and who can help the company tap the unfolding opportunity.
 
While the Street has concerns over the high promoter pledge, the company indicated that Essel Group (the parent of Zee Entertainment) is working on generating cash from power transmission, solar and road assets.
 

This is expected to be used to bring down the quantum of pledged shares.  Experts believe there might not be much interest from strategic investors, and the acquirer would want control.
 
If the promoters sell out, minority shareholders could benefit from the resulting open offer and the premium that the acquiring firm will need to pay. Among near-term headwinds are the implementation of the new tariff order, which could impact subscription revenues in the near term.
 
Analysts, however, believe that while there could be near-term implementation related issues, this will not impact Zee much. What will have a bigger impact is higher competition from the online applications, as well as Jio’s bundling of services.
 
Analysts at Bank of America Merrill Lynch say the long-term impact will be on advertising spends as advertisers focus more on OTT platforms. Second, broadcasters will have to spend more on making quality content to compete with the likes of Amazon and Netflix, among others.
 
While a majority of brokerages continue to have a buy rating on the stock, investors should await clarity on the stake sale and the traction the firm is able to get on its OTT platform ZEE5.