Subhash Chandra-led Essel group firm Zee Learn has drawn the ire of proxy advisory and governance firm Institutional Investor Advisory Services (IIAS) for misgovernance.
“Zee Learn’s board and management have not provided the requisite leadership resulting in poor capital allocation decisions, including a botched-up acquisition. Plagued with high debt and weakening cash flows, the problems are exacerbated by pledged promoter equity,” IIAS said in a note to its clients titled ‘Zee Learn fails its tests’
IIAS has said “investors may need to wrestle the company out of the promoters’ control and influence.”
Shares of Zee Learn have halved in the past one year. In comparison, the BSE 250 index has declined 30 per cent.
Zee Learn is an education company catering to students from pre-school up to class 12 through brands such as Kidzee and Mount Litera.
In February 2018, the company picked up 59.5 per cent stake in MT Educare for Rs 280 crore.
IIAS said the acquisition led to value destruction for both the shareholders of Zee Learn as well as MT Educare.
ZEE Lean had a peak market capitalisation of Rs 1,560 crore in March 2017, which is now down to below Rs 450 crore. MT Educare’s market cap too has dropped from peak of Rs 700 crore to less than Rs 90 crore at present.
“ZEE Learn and MT Educare have complementary businesses – while ZEE Learn focused on in-classroom education (pre-schools to K-12), MT Educare provides after-school tutorials (like Mahesh Tutorials, Chitale classes); yet the companies have been unable to leverage each other’s reach and brands to build synergies,” notes IIAS.
In the note, the governance firm has also raised red flags over capital allocation practices, related party transactions (RPTs), volatility in cash flows and high pledging of shares by promoters.
IIAS believes changes in the board's composition and induction of strategic investors would alleviate some of the problems at the education firm.
“Investors need to rally together to extricate the company from the promoters’ control. This could be done by recrafting the board and ensuring stability at the management level. And a hard look at the company’s capital allocation decisions is also warranted. The best option for all stakeholders, of course, is to bring in a strategic investor who can establish control and steer the business,” the note said.