Zeestructuring

SPECIAL REPORT

Splitting the company into four listed entities should help unlock value for shareholders.

Zee Telefilms has decided to restructure its operations in order to bring in greater clarity and focus to the business.

Says Subhash Chandra, chairman, Zee Telefilms, "We plan to demerge the company's businesses into different entities "� Zee News (ZNL), Wire and Wireless (India) (WWIL) and ASC Enterprises. The demerger is expected to be completed within six to eight months and the demerged entities will be listed on the stock exchanges."

The idea behind the move could be to separate the broadcasting and distribution businesses so as to impart greater transparency to each of the segments. National channels like Zee TV, Zee Cinema, Zee Smile and Zee Cafe will remain in ZTL.

All the regional channels including Zee Marathi and Zee Gujrati, among others (as they have news content), along with Zee News and Zee Business will be brought under ZNL.

Its cable business together with its 100 per cent subsidiary, SitiCable will be demerged into WWIL. The Direct-To-Home (DTH) business of Zee will be consolidated under ASC Enterprises, which holds the DTH licence.

Shareholders of Zee Telefilms would receive 137 equity shares of Zee News for every 100 equity shares held and one equity share of WWIL for every two equity shares of ZTL held. The swap ratio for the DTH entity has not been announced as yet.

According to the management, restructuring is also necessary as regulatory compliances are different for various businesses. Also, due to regulatory restrictions, the business of Dish TV was structured in a very fractured manner and hence was difficult for ZTL shareholders to understand.

At the same time, the structure was also tax inefficient. A clear direction for growth was difficult to formulate. As per the company, the cable assets are being hived off, as they are under-utilised despite large, well positioned investments. Further, substantial funding is required for a cable business which would be simpler to achieve with a focussed entity.

"We are confident that these measures, if approved, would result in streamlining operations and better exploitation of opportunities in each area or buisness and would build long term shareholder value. It would also clear the ground for acquisitions and strategic or financial partners in the demerged businesses, apart from unlocking shareholders value," says Chandra.

Currently, ZTL is trading at a trailing PE of 80.56. But analysts are unable to comment on the valuation of its demerged businesses and the percieved benefit to the shareholders. 
 

FINANCIALS
	FY02	FY03	FY04	FY05
Net Sales (Rs Cr)	394.12	438.53	540.21	704.28
Y-o-Y Growth (%)	-	11.27	23.19	30.37
Operating Profit (Rs Cr)	203.80	199.46	234.83	255.55
Y-o-Y Growth (%)	-	-2.13	17.73	8.82
Operating Profit Margin (%)	51.71	45.48	43.47	36.29
Net Profit (Rs Cr)	104.51	87.49	116.97	160.64
Y-o-Y Growth (%)	-	-16.29	33.70	37.33
Net Profit Margin (%)	26.52	19.95	21.65	22.81
EPS	2.53	2.20	2.91	3.89

Moreover, they feel that the EBITDA of ZTL post demerger is unlikely to change. However, one analyst believes that ZTL's EBITDA would increase since many of the loss making businesses would have been demrged.

But the counter argument to this is that soon there is bound to come some addressibility in the system. When this happens, the cable business would show significant revenues. Thus ZTL stands to lose this potential revenue.

Analysts say that it is very difficult to value WWIL currently since its value would depend on the strategic investor that Zee is able to rope in. Some anlaysts also find ZNL an unattractive investment since the news and the regional channels face high competition.

The reason these channels were able to attract advertising revenues is because they were being bundled togther with the flagship channel. The subscription revenues of regional channels would depend on how they will be priced in the conditional access system (CAS) regime.

Industry observers have no doubt that the issue of addressebility would soon be resolved. In fact, there are already talks of the CAS being implemented. Once implementation of the CAS gains momentum, Zee will try to push its DTH business.

Currently ZTL has a million subscribers under DTH. Analysts are however divided on which is likely to be the eventual winner. Some see more takers for the CAS as the initial expenses are comparatively lower.

But some see more growth coming in from DTH as they expect it to be preferred more by both broadcasters and subscribers "� broadcasters, as it eliminates local cable operator and subscribers, as it gives better visual reception.

Also, DTH has the potential to widen its reach as it can be implemented even in areas where there are no local cable operators. Thus, the DTH entity is likely to generate investor interest.

But the swap ratio of the DTH entity for existing shareholders of ZTL has not been decided. So, if promoter's share in the DTH company is high , the stock would be unattractive from an investor's perspective.

The two newly formed entities for the CAS and DTH would, in a way, be competing against each other. WWIL's business is connected with the cable operations while ASC deals with the DTH business. Both these would be striving to garner a larger share of the same pie. Zee today has a presence across 120 countries.