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Market Insight

Essel group sold stake in ZEE to US fund in order to serve its debt obligations

October 07, 2019  | Subscribers Only

Constantinos Papavassilopoulos Constantinos Papavassilopoulos Associate Director, Service Providers & Platforms, IHS Markit

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Essel Group, the Mumbai-based Indian conglomerate, announced on the 31st of July 2019 that it had agreed to sell 11% of the shares it controlled in ZEE Entertainment Enterprises Ltd (ZEEL) to Invesco Oppenheimer Developing Markets Fund (Oppenheimer). According to the announcement, Oppenheimer paid a total of Rs 42.24 billion (equivalent to $611.6 million).

The deal is assigning ZEEL with a market valuation of Rs 38,400 crore (equivalent to $5.6 billion). This agreement is logically putting an end to months of speculation about a possible buy-out of ZEEL.  

Our Analysis

After a long and protracted quest, Oppenheimer is the preferred buyer for Essel Group's minority share in ZEEL. The US fund has been an investor in ZEE from 2002, currently holding a 7.74% stake in the company which will rise to 18.74% once the transaction is completed. Articles in the Indian Press referred to the excellent working relationship between the top management of Oppenheimer and Essel, a factor that had possibly facilitated the negotiations between the two parties. Sources from the Mumbai Stock Exchange stated that the deal offered a premium of 11% in share valuation, over the current stock price.

Essel Group’s main business incentive for signing this agreement is to have access to liquidity to repay a tranche of its debt by the deadline of 30 September 2019. The total debt of Essel Group at the end of June 2019 stood at Rs 17,000 crore ($2.4 billion). The Indian company had an obligation to make a payment of Rs 11,000 ($1.55 billion) by September the 30th, 2019, to avoid a default. Oppenheimer’s investment covers roughly one-third of that debt obligation, generating doubts whether Essel Group is contemplating a further sale of ZEE’s shares. Sources close to the management of Essel group have revealed in the Indian media that the company is planning to sell stakes in non-media businesses that it controls, like renewable energy and road infrastructure in order to de-leverage its balance sheet.

The sale of a stake in ZEEL has turned into a saga as it was originally supposed to be completed by the beginning of 2019 with Sony Corporation seeming to be the most prominent bidder. However, the deal with Sony was derailed because of differences over the valuation of Essel Group in March 2019. The next candidate was Comcast, the US cable and telecommunications group which owns NBCUniversal and SKY plc. Comcast led a consortium comprised of members like the Blackstone Fund and James Murdoch’s Lupa Systems. The consortium wanted to buy-out all the shares controlled by the Chandra family (major owners of Essel Group), a proposal that was not accepted by the Indian company.

For the Chandra family, a major consideration for selecting a financial investment company as their partner, is that the former can remain in charge of managing ZEEL. The Chandra family has built ZEEL into the largest Indian media & entertainment brand since 1992. At the end of June 2019, they controlled 35.79% of the shares but more than half of them (22.91%) were pledged to lenders. Articles in the Indian press referred to a possible interest from Reliance Industries Ltd, the parent company of telco Reliance Jio. It is doubtful whether an acquisition of ZEEL by Reliance would have successfully passed the scrutiny of the Indian competition authority as Reliance already controls another large media company, Viacom18. Logically, the Chandra family would have great reservations about selling its stake to another Indian competitor.

Another possible explanation as to why the Chandra family wants to keep the management of ZEEL is the healthy prospects of substantial business growth, especially from the standalone Online Video (OTT) platform of the company, ZEE5. ZEE5 has managed to become the 3rd largest OTT service in India at the end of 2018, just 10 months after its launch, according to IHS Markit. ZEEL is investing around $50 million, on an annual basis, to ZEE5 for the production of original Indian content, according to IHS Markit estimates.  

 

Geography
India
Organization
Zee Entertainment
Research by Market
Media & Advertising
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