- #SonyMerger Overhang: Brokerages downgrade #Zee
- Will institutions seek EGM for change in management?
Here's what Sajeet Manghat, Niraj Shah, Tamanna Inamdar and Alex Mathew are discussing on today's 'The Editors' Cut'.
- Will institutions seek EGM for change in management?
Here's what Sajeet Manghat, Niraj Shah, Tamanna Inamdar and Alex Mathew are discussing on today's 'The Editors' Cut'.
Category
📺
TVTranscript
00:00 It's time for Editor's Cut.
00:01 And Alex, could be an interesting one
00:03 because the stock or the story firmly in focus today is Z.
00:08 No doubt.
00:09 In fact, that has to be the big focus, of course,
00:12 from the corporate side.
00:14 Culturally, religious significance, of course,
00:17 the other big headline, we've all
00:18 spoken about it over the course of Monday
00:21 and heading into today as well.
00:23 But incidentally, the man of the moment, if you can call him
00:26 that, was at the inauguration of the Ram Mandir as well.
00:31 Let's talk about Z Entertainment because really, I
00:34 think you were talking about this on the trade setup
00:36 and you said it's a slam dunk.
00:38 But there are a few more questions
00:39 that I think remain unanswered.
00:41 And I think Sajid is going to lay out those questions for us.
00:44 The reason being that this entire deal, the people that
00:48 are the institutions that were more
00:50 focused on its fructification were the institutions that
00:53 were holding stake.
00:54 It's a considerable amount of Z Entertainment
00:57 that is held by institutions.
00:59 So what is the context?
01:00 What was the big problem that led to the deal supposedly
01:04 being scuppered?
01:06 So put the context in place.
01:09 Two years ago, when the merger was announced,
01:11 Z was facing the biggest governance issue with respect
01:15 to the group, SL group defaulting
01:17 on some of the loans.
01:19 Many of the mutual funds had to take a hit because of that.
01:23 And this deal with Sony came as a savior for the institutions
01:27 because they then thought that the merged entity with Sony
01:31 being the majority owner would be a game changer,
01:35 not only for the entertainment industry,
01:37 but also from their holding point of view.
01:40 The stock is now pre-merger price.
01:44 And it's going to slip further because the industry dynamics
01:46 have changed in the last two years to set a context there.
01:50 You have a competitive industry.
01:52 Ad revenues are not growing.
01:53 Profitability and EBITDA margins for Z
01:55 has been falling in the last two years.
01:57 All this is putting in a lot of stress
02:00 for Z and Z's financials.
02:03 In this context, the institutions
02:05 play a bigger role now because 71% is held by them.
02:09 71%?
02:10 71% is held by them.
02:11 So to break it up, 32% is held by mutual funds.
02:14 And they've been backers of Pudin-Goyenka
02:16 through the times when the SL group was facing
02:18 an issue with respect to debt and other restructuring, which
02:21 was happening.
02:22 They had to sell off many of their assets
02:24 to pay off the mutual funds.
02:25 Then you have insurance companies,
02:27 which is having 10%.
02:29 And then you have foreign financial institutions
02:33 or foreign portfolio institutions.
02:35 It's all nearly 27% odd.
02:37 So 71% odd is held by institutions.
02:40 And they have a big say in how this is going to do.
02:43 We've seen in the past that institutions can be active.
02:47 And this time, we're fearing the murmurs,
02:51 that there will be institutional activism that
02:54 will come in asking for an EGM.
02:56 So I don't know when it will come in, but there are murmurs.
03:00 The law requires them to have at least minimum 10%
03:02 of the equity pooled, pooling, so that they
03:06 can ask for an EGM.
03:07 But that is going to be a big challenge going for Z.
03:10 Z is also facing a big challenge with respect
03:13 to Sony seeking $90 million in break-away fees.
03:16 So that is exactly what we need to get to,
03:18 because that is the legal aspect.
03:19 Of course, there is going to be a challenge.
03:22 They've stated it clearly, Tamanna.
03:24 But that amount that is being claimed by Sony
03:27 is going to be a big problem that Z will have to face now.
03:31 So the sense I'm getting-- of course,
03:34 Z has very clearly said that they're
03:36 going to go the legal route.
03:37 There's no mystery there.
03:40 It's in their press release that they will go the legal route.
03:43 Look at Puneet Goenka's tweet from Ayodhya,
03:46 where he says that this is a blessing from Lord Ram.
03:49 So this story is going to evolve in very interesting ways.
03:53 The first logical step is that they
03:55 go to an arbitration tribunal, because now the fight will
03:58 be about who pulled the plug.
04:01 Sony did pull the plug.
04:02 There's no confusion about that.
04:05 Why did they, and were they justified in doing that?
04:08 So Z will not only challenge, in all likelihood,
04:11 the $90 million.
04:14 Don't be surprised if they have a counterclaim.
04:16 And that's what we're learning.
04:18 It's very likely that they will have a strong counterclaim
04:21 coming in, because they will say that we
04:23 shut our international verticals to adhere to this deal.
04:27 We took on expenses to adhere to this deal.
04:29 And what about that?
04:30 Because you were the one who pulled the plug.
04:33 The sense I'm getting is that the core legal argument
04:37 from Z is going to be that the CPs--
04:39 that's the conditions precedent that you
04:41 need to fulfill a deal--
04:43 that we did our part.
04:45 Some of those had to be operationalized
04:47 once the merger date was finalized.
04:49 That never happened.
04:50 Some of them were joint conditions
04:51 we had to fulfill, which we could never do.
04:54 So it's not on us.
04:56 It's on you.
04:57 This is going to be a long, protracted fight.
05:00 We haven't seen the end of it yet.
05:01 So Puneet Goenka, just before I come to you,
05:03 Neeraj, on the brokerages and what
05:05 is likely to happen on the stock price.
05:08 But Puneet Goenka's role, even though a lot of people
05:11 have spoken about it, that was in the original deal, right?
05:14 It is part of the original deal because he
05:17 has built a business in Z Entertainment.
05:19 And that's the reason why when the promoters went
05:22 through the worst in terms of SL loans and defaults,
05:27 the mutual funds were backing Puneet Goenka in Z.
05:30 And that's the only reason why many of the mutual funds
05:32 stood their ground and they stayed invested in Z Entertainment
05:38 because there was a Puneet Goenka there.
05:41 Now things have taken a turn with respect to governance.
05:47 In the last two, two and a half years,
05:48 there are a lot of related party issues which have come out.
05:52 There have been some provisioning which has been done,
05:55 cleaning up the balance sheet, which is done.
05:57 And still it's open there.
05:58 We don't know what is the extent.
06:00 Now if you look at--
06:01 I was just looking at the--
06:02 The investigation, you mean?
06:03 Investigation is still on.
06:05 And SEBI has come out with a final report.
06:07 But if you look at from a financial point of view,
06:09 Z at the end of September had some 260 odd crores in cash.
06:13 Their trade receivables have gone up to 2,100 crores
06:16 from nearly 1,500 odd crores at the end of March.
06:19 So there is an issue with respect to cash coming back.
06:22 And we don't know how much of that
06:23 is coming from related parties or distribution companies which
06:27 are related to the group, which is there.
06:29 So it is going to be a mess for Z in the short term.
06:33 There has to be some cleaning up which has to be done.
06:37 Conditions precedent is just a legal thing.
06:41 But if you're dealing with a US and a Japanese company,
06:47 they will go to the dots.
06:48 They'll sign off only when the dots and the Ts are slashed.
06:53 Yeah, but you know, Haji, the question is that all of this
06:56 is in the public domain.
06:58 Sony did an extensive due diligence.
07:01 The big mystery of the coming off of this deal
07:04 is that there was nothing that was unknown.
07:07 If you and I and everyone know that there
07:09 were concerns in the books or quote unquote
07:11 skeletons in the closet, it was not a secret from Sony.
07:14 True, but--
07:15 So the question today is what was going on for so long
07:19 and what actually led them to pull the plug eventually?
07:21 So true.
07:22 The governance issue is not an old one.
07:25 Exactly.
07:25 It's not a new one.
07:26 It's an old one which is there.
07:28 But there has been promises made,
07:30 saying that books will be cleaned up,
07:32 subsidies will be shut, which are
07:34 non-compliant with US norms, or investments
07:37 made in certain companies will be hived off, which will not
07:40 be part of the merger.
07:41 None of those has happened in the last two years.
07:43 Nor we have heard about it from the Z management
07:45 in the last two years when they have spoken with our analysts.
07:49 Got it.
07:49 I want to talk about the brokerages,
07:51 because a lot of them have come out, Neeraj,
07:53 and put out a sell recommendation.
07:57 Chances are, with the kind of sellers
07:59 that will come into the play, into the fray today,
08:02 and that are unlikely to be buyers at this price,
08:04 at 230 rupees per share, the stock price
08:06 is going to go down through the floor.
08:08 Yeah, so I'll just take 60 seconds,
08:10 because we are almost at the end also.
08:11 But suffice to say, you don't need brokerages to tell you
08:14 that the stock will go down.
08:15 So it will go down.
08:16 It will probably stay down.
08:17 Very unlikely that there will be buying positions.
08:19 More importantly, what happens next,
08:21 aside of the fact that there is a protracted legal battle,
08:24 is it a cheap media asset?
08:27 Yes.
08:28 But is there intensifying competition?
08:30 Most certainly.
08:32 Sajid would be best placed to talk about this.
08:34 We don't have time, I know.
08:36 Maybe a bit later on in the show.
08:37 But remember that there is a potential mega
08:41 deal in the offing, in the competition ranks as well.
08:45 And does that bring to risk, as per the city note,
08:48 the sub-licensing of cricketing rights
08:50 that Z and Disney have as well?
08:53 Because supposedly, in one of the notices,
08:56 Z had missed one payment as well.
08:58 So are there issues out there too?
09:00 So while it's a cheap media asset,
09:03 it is one laden with problems.
09:05 Would people want to look at others
09:06 which are a bit more stable?
09:08 I think I rest my case there.
09:09 There won't be buyers.
09:10 But even if it's cheap, maybe people
09:13 want to look at stability as opposed to just something
09:16 which there is a protracted legal battle.
09:18 I have a bigger fear here.
09:19 We don't have time, but yeah, very quickly.
09:20 I have a bigger fear here.
09:21 The problem is that there's very little coverage
09:24 to the media and entertainment space by institutions.
09:27 And Z is the only one which is covered by many institutions.
09:31 If the governance issues and this
09:32 are not sorted in the near term, we won't have any coverage.
09:35 OK, that's it.
09:36 So it's incumbent on you, Sajith, and us
09:38 to bring some coverage and some analysis.
09:40 So we will try and get you that.
09:43 And that brings us to the end of this particular edition
09:45 of the Editor's Cut.
09:46 Maybe we don't have all of the answers,
09:48 but some of the answers, hopefully,
09:49 you've gotten this morning.
09:50 [MUSIC PLAYING]
09:54 (electronic music)