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Zee Entertainment Can It Be Rescued?


Posted on 02-Aug-2019 Comments  0

Zee Rescue

Can the Zee promoters actually pull a miracle and repay debt

During the previous week, the big news on the business circuits was that the beleaguered Zee group had reportedly managed to find a buyer for the promoter stake in Zee Entertainment. However, the markets were not really enthused by the deal and if the Zee price performance is any indicator, the stock has corrected nearly 10% after the deal announcement. There are still a number of questions that remain unanswered by the deal. Here are four such questions.

Deal is yet to be signed off

In the midst of all the euphoria it still needs to be remembered that the deal is yet to be signed off. The INVESCO Oppenheimer Fund is yet to confirm the deal from their end and as we have seen in the past there is many a slip between the cup and the lip. The deal is still just an expression of intent.

Valuation could be the issue

Zee’s earlier deal to sell a stake to US based Comcast did not go through on valuation considerations. In this case, the deal has been struck at Rs.400 per share, which is far lower than what the lenders were expecting for the stake sale. After the financial dealings with group companies became public, some of the investors have been worried. The skewed TRAI order on tariffs has also not gone down too well with investors. Valuations will remain an issue!

Do the numbers add up?

Actually, it is hard to fathom how the numbers will actually add up in this case. The deal with INVESCO has been struck at around Rs.400 per share so the 11% stake sale will help the promoters to raise nearly Rs.4224 crore. Zee promoters had originally planned to sell 20% of their stake by September but they have apparently managed to only get buying interest to the tune of 11%. That leaves a huge shortfall. The promoter debt via pledges is currently at Rs.13,000 crore. Out of this overall debt, Rs.7,000 crore is payable to the Indian mutual funds by September as part of the standstill agreement. It is not clear whether banks will allow Zee to prioritize mutual funds over banks. This continues to remain a major issue!

What about promoter role?

Over the last 25 years, Subhash Chandra has been synonymous with the Zee group in India. The promoters have 35% stake in the company. With the 11% stake sale, the promoters will be left with just 24% and if the 20% stake sale actually goes through then the promoters will be left with just about 15%. That would effectively mean that the promoters would lose management control of the group. A lot of the current agreements with lenders are verbal in nature. How these deals stand remains to be seen. Next couple of months could be interesting on the Zee front!

Budget U-Turns

Government has done 3 key U-turns on the budget; and rightly so

With Union Budget 2019 announced, there were quite a number of issues that became the bone of contention. Four issues really stood out in the budget. Firstly, government planned an issue of sovereign bonds. Secondly, the buyback tax was introduced. Thirdly, the surcharge on HNIs was increased which impacted FPIs in the process. Lastly, the budget also made a proposal to increase mandatory public shareholding in listed companies from 25% to 35%. Apart from the buyback tax, the government has done a U-turn on the other three.

Going slow on FPI tax

The rethink on this subject was clear the moment the PMO called the FM for a high level meeting. The budget had introduced higher surcharge on persons earning more than Rs.2 crore and Rs.5 crore in graded slabs. The catch was that this rule would also apply to AOPs. Now, 40% of the FPIs in India are structured as trusts or AOPs and they would automatically come under the ambit of higher surcharge. This would increase the effective capital gains tax liability on these FPIs. It had led to surge in selling from FPIs with more than $3 billion exiting Indian equities since the Union Budget. Now, there is an indication that the government may invoke provisions of Section 119 to make a special exception for FPIs. After all, selling by FPIs is not something the Indian rupee or the Indian economy can afford at this point of time!

Public shareholding hike

Another big announcement in Budget 2019 was the proposed increase in public shareholding from 25% to 35%. The government surely had its heart in the right place because it would just ensure that more quality paper will be available in the stock markets. This would address the issue of liquidity and also the issue of asset price inflation that we have been seeing in equities for quite some time. However, the backlash from the markets had a different point. Firstly, this would force large companies like TCS, Wipro and D-Mart, among others to mandatorily dilute their stake. Secondly, this could result in additional floating liquidity of around $50 billion in the market depressing valuations and prices. Not surprisingly, this idea has been put in cold storage for now!

Rethink on sovereign bonds

One more announcement that has been silently put in the back burner is the issue of sovereign bonds. Here again, the PMO had raised concerns over the currency risk in the event of any weakening of the rupee. Government may try its best to underplay the sovereign bonds and that is already obvious from the cues coming from finance ministry. The FM is now talking about a phased issue of sovereign bonds rather than issuing $10 billion in one go. For now, it looks like these bonds are not taking off!

Fed Rate Cut

How India should interpret the 25 bps rate cut by the Fed?

On the 31st July when the Federal Open Markets Committee (FOMC) concluded its meeting, it took a call to cut the Fed funds rate by 25 basis points. This effectively took the benchmark rate from a range of 2.25-2.50% to a new range of 2.00-2.25%. What was the logic for this rate cut and how should Indian markets interpret the same?

First rate cut in 10 years

The rate cut was always on the cards and the CME Fedwatch tool had already hinted at a 100% probability of a rate cut in July! In fact, the CME Fedwatch tool was actually split between a 25 bps rate cut and a 50 bps rate cut. The FOMC statement was quite clear that the rate cut was being undertaken in the light of the improved growth, higher levels of consumer spending, lower rate of unemployment and interest rates being stable at around 2%. The FOMC underlined that a rate cut of 50 bps would have been too aggressive and future rate cuts would be driven by data flows. While the Fed has not ruled out further rate cuts, it has desisted from giving any commitment on the future direction of rates. In another significant move, the Fed also indicated that the bond reduction program of the Fed will be wound up 2 months earlier. This is a clear signal to the markets that the Fed will keep the liquidity levels in the system comfortable. The Fed rate has to be actually looked at in conjunction with this commitment on liquidity.

How should RBI interpret?

For the RBI, there are 2 key takeaways from the Fed action. Firstly, the rate cut initiative by the Fed is significant in the sense that it clearly signals a shift towards easy money policy across central banks. This approach has been affirmed not only by the Fed but also by other central banks like the ECB, Bank of England and the Bank of Japan. This largely gives the RBI a perspective on how it needs to structure its thinking. After all, in the interconnected financial system, it is not possible for any central bank to stay decoupled with the bigger central banks for too long. Secondly, the cut also implies that the risk of capital outflows from debt may not be too material. The rate differential will still be maintained even if the RBI cuts rates by 25 basis points in its August policy.

What about equity markets?

In the last 20 years, there have been 3 occasions when the Fed has hiked rates sharply; 1998, 2004 and 2016. On the first two occasions, the subsequent cut in rates took the Fed rates to lower than the pre-hike levels. It is from this point of view that the markets will look to interpret the first rate cut by the Fed in the last 10 years. Will this rate cut mark the beginning of the rate cut cycle? In the past, catching Indian equities at this point of the Fed cycle has been extremely profitable in the long run. That could be the real takeaway!

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