What’s Going on With Zee Entertainment? Is it Time Up For the Goenkas?

Zee Entertainment Enterprises (hereinafter referred to as Zee), one of the most prominent media and entertainment companies in India, is currently witnessing a boardroom scuffle.

Here’s what happened.

• On September 10th, a proxy advisory firm called IiAS published a report raising serious corporate governance issues in the company.
• Later that week, two of Zee’s largest investors — Invesco Oppenheimer and OFI Global China, with 7.74% and 10.14% stake respectively — called for an Extraordinary General Meeting (EGM) of the investors to oust the current CEO Punit Goenka (son of promoter Subhash Chandra) and a few other members of the board.
• Two non-executive non-independent directors on the board tendered their resignations.

Now, as much enthusiasm as these events sparked among the investors regarding a potential clean-up in the house of Zee putting an end to years of choppy corporate governance that had plagued the company, it enthused a larger upheaval across the markets.

Shares of Zee soared by close to 40% (52-week-high) in a day on the hopes of takeover and board reshuffle. The call options on the Zee stock rose by as much as 9,600%. Some like Rakesh Jhunjhunwala availed themselves with this opportunity to buy 5 million shares (0.52% stake) of the company and register a market-to-market profit of ₹20.53cr ($2.7m) in one day.

Following this frenzy, the NSE placed Zee under an F&O (futures and options) ban restricting any new fresh positions in Zee F&O contracts.

Agreed, that is a whole lot of information to process in under a few passages. So, let’s break down the events which led us here and what’s there to look forward to.

The Going-Away of Goenkas

Zee Entertainment Enterprises was founded by Essel Group founder Subhash Chandra Goenka. A once-successful conglomerate, the company was hit hard by multiple defaults and crises over the last few years.

This finally prompted Subhash Goenka’s step-down as the Chairman and dilution in the Goenka family’s stake in Zee which now stands at sub-4%. This was over 35% at one point before the promoters pledged their Zee shares for the loans taken by Essel Infraprojects which the lenders later sold. Although his son, Punnet Goenka, continues to run the company, a significant part of it is owned by FPIs (nearly 57.46%) and non-promoter shareholders.

Invesco and OFI Global China together hold a 17.88% stake in Zee. The shared activism of both has resulted in their call for removal of three directors, two of whom have quit already — Manish Chokhani and Ashok Kurien — with CEO Goenka being the third.

The two shareholders also sought to appoint six new directors in the 39th Annual General Meeting (AGM) which concluded yesterday. However, the meeting, chaired by the CEO, conveniently sidestepped the issue of the proposed board reshuffle.

Why Investors Wish to Boot Out Goenka?

Aside from allegations of misgovernance, many have had doubts about the persisting promoter influence in the company. Following the debt recast and ownership rejig of Zee in 2019, many had hoped that the association of Goenkas with the company had come to pass.

Alas, no. The exit of Subhash Goenka didn’t go as far as severing the family’s ties seeing as Punit Goenka stayed behind in his position as the MD and CEO. This led to Subhash Goenka’s continued micro-management of Zee from outside which angered the investors.

Added to that, relations between the Goenkas and Invesco have deteriorated in light of the fact that the latter is not part of the board. The ₹4,224cr ($575.2m) investment lifeline that Invesco threw Zee in 2019 has halved in value now due to the stock’s underperformance.

FYI: This is the first time that foreign shareholders are convening an EGM in a listed Indian entity and demanding a board reconstitution.

This caused other investors to rally to Invesco’s side as they reportedly witnessed the same kind of governance issues and lack of transparency in the company that had crippled it financially, exacerbated a debt crisis and severely eroded its market value.

Although the company managed to survive those fallouts and has reported an increase in revenues and profits since, it hasn’t fared well in the TV ratings race. Zee TV, its flagship TV channel and a major revenue generator, has been lagging alongside its rivals for a while (No. 9 below the likes of Sony Sab, Colors, Star Plus, etc.). The promise of building the OTT and digital business on a larger scale didn’t deliver either owing to the preoccupation of the Goenkas with their television fortunes.

The company converted 75% of its EBITDA into free cash flow last year, an unusually lofty number in the media and entertainment sector which has progressed towards more investment into content. While this can be positively spun into a case of high free cash flow generation, it is more indicative of the management’s reluctance towards investing despite witnessing a drop in ratings across key channels due to no meaningful upgrade in the content library.

And it isn’t just Zee Enterprises that is facing a corporate battle. Another former Essel subsidiary, Dish TV, headed by Jawahar Goyal, Subhash Goenka’s younger brother, is facing similar troubles. Yes Bank, Dish TV’s biggest lender, recently demanded the ouster of some top executives in the company alleging “dubious” investments and mismanagement.

All these actions, when put together, have convinced the investors of the rogue tendencies employed by members of the Goenka family which could jeopardise the fate of the group companies. So, essentially, it wasn’t a question of why Punit Goenka is being ousted but rather when.

What Lies Ahead?

As per regulations, the board has to call for an EGM (as demanded by Invesco) within 21 days to decide on the proposals. If not, then the investors can call for an EGM themselves within 45 days. All that stands between Punit Goenka and the executive control of Zee is a simple majority (of those present and voting) on the proposals to pass in the EGM.

However, it seems like Mr. Goenka is unlikely to go out without a fight. He is reportedly employing a two-pronged strategy to keep his title that involves a) a white knight plea, and b) gathering of votes. Seeing as neither Goenka nor Invesco has a controlling interest in the company, a lot depends on which way the remaining shareholders swing.

Despite whichever team wins, the stock performance of Zee remains significantly down (by almost 55%) from its prime in 2018. Even if the Goenkas are booted out for good, it will perhaps be a while before one sees a meaningful upswing in the company’s financials. The stock currently trades at an EV/FY21 EBITDA of 13x and forward EV/EBITDA of 11x. While this may suggest a somewhat attractive entry point into the stock, it is worthwhile to note that FY21 witnessed a sub-10% in EBITDA growth despite coming off a small base. While Indian media companies tend to trade at a premium, there are just too many execution-related questions looming large and painting an optically unpleasant picture.

On top of that, promoters with less than 5% stake running the day-to-day operations is an ill-suited example of corporate governance as evident in Zee’s case. A dragged-out boardroom battle could cook up more uncertainty given the ongoing frenzy in the stock. Any potential open offer by an investor to counter Invesco or ride a hostile takeover attempt can be taken advantage of through opportunistic purchases.

Although it may have lost its erstwhile sheen, the company is still a big brand with a large network and strong operations. Once the roadblock of corporate governance is lifted and the right people are put in charge, the company can expect to gain heightened visibility along with a fundamentally better and cleaner growth profile.

(Originally published September 17th 2021 in transfin.in)