The race to bottom

Pledging shares when credit froze has Chandra’s two strong media arms in a tight

spot

Prathamesh Mulye

Mumbai: In the nineties, media tycoon Subhash Chandra had rejected American media mogul Rupert Murdoch’s hostile takeover bid, proudly asserting that “India is not for sale”. At the time,

Chandra had launched the first satellite channel of India – Zee – when the government of India

had monopoly over the broadcasting industry. His cold snub to Murdoch could be seen as

overconfidence. But a look at what he managed to build over the next 20 years shatters all such

notions. With a keen eye for content and the right business acumen, Chandra turned Zee into the highest revenue grosser in the media industry. His bouquet of 76 channels boasted of an unheard of reach of 1.3 billion viewers in 173 countries. Chandra’s other listed venture, Zee Media Corporation, has also grown multi-fold, with 327 million viewers and 14 news channels.

Having built a formidable media empire, Chandra, who chairs the Essel Group, diversified into non-related businesses, including amusement parks, packaging, infrastructure and lotteries. But the tides, as is evident, have changed. While the media tycoon successfully warded off the takeover attempt in the nineties, his fortunes have nosedived in the past six months. A debt-

ridden in infrastructure business, coupled with allegations of money laundering have meant that

Chandra cuts a sorry figure as he make his last ditch effort to survive. The media baron is forced

to sell off stake in what he describes as “the jewel of his crown” Zee Entertainment (ZEEL). The

founder, who controls 40% stake in the ZEEL, is offloading half of his stake as the debt at the

group level spikes and refinancing becomes difficult due to the default of IL&FS.

According to media reports, the debt burden of the group stands at Rs 17,000 crore across 87

companies. Adding to Chandra’s woes, the stock price of Zee Entertainment and Zee

Corporation collapsed with investors taking the flight to safety approach. On January 25, Zee

Entertainment and Zee Media Corporation sunk 33% and 37% respectively, leaving Chandra in a tight spot. In February, the Zee group-owned Daily News Analysis also announced the closure of its Delhi and Jaipur edition.

Beginning of woes

It all started on January 25, when shares of Zee Media Corporation and Zee Entertainment

tumbled after an investigative news portal, The Wire, reported that Subhash Chandra’s Essel

Group has links to a company probed by investigators for money laundering during

demonetisation. The Serious Fraud Investigation Office (SFIO), which is currently probing a

company named Nityank Infrapower for deposits of over Rs 3,000 crore made just after

demonetisation (November – December 2016), had ties with Chandra’s group. The Wire’s

investigation of publicly available documents revealed that Nityank and a group of shell firms

carried out financial transactions that involved a few firms associated with the Essel Group

between 2015 and 2017.

According to the news website, Nityank also went on to play a crucial role in a large business

deal between the Videocon and Essel groups in November 2016, leading to a Delhi high court

case. Essel Group maintained that Nityank is an independent firm, while Videocon alleged

otherwise.

The case can be traced back to National Company Law Tribunal (NCLT). Nityank had

approached the NCLT to prevent allotment of shares to Videocon group company Domebell in

the merged Dish TV entity. The company claimed that it had a pledge on Videocon D2H shares

owned by Domebell and hence they should be allotted to it.

However, Domebell and a group of other Videocon companies such as Electroparts later

approached the Delhi high court on August 31last year claiming that Nityank is an Essel group

company and had unlawfully invoked a pledge.

While the case goes on, these damning allegations of links to a tainted company have come at a

wrong time for Chandra. Essel Group is bearing the brunt of massive debt at the group level and

the promoters have pledged a portion of their shares in the listed entities as collateral. The

group’s non-media entities, especially Essel Infrastructure, has been making losses due to some

“incorrect bids”.

And as the cost of borrowing goes up after IL&FS crisis, Chandra is finding it difficult to raise money to service debt. In his emotional plea to the investors, the media baron had stated that “as most of the infra companies, even we have made some incorrect bids”. “In usual cases, Infra companies have raised their hands and have left their lenders with non-performing assets, but in our case, my Obsession of not walking away from the situation, has made me bleed Rs 4,000 crore to Rs 5,000 crore. Despite the loss making projects, we continued to pay the interest and the principle, by borrowing funds against our shareholdings in Listed Companies,” he wrote.

Chandra added that the situation at hand became further unmanageable after the IL&FS issue came to public light. “Till then, we were managing our borrowings efficiently. The IL&FS

meltdown stopped the roll overs, diminishing our ability to service our borrowings,” stated

Chandra in his letter.

Losing value

So how does the rising debt at promoter level affect Chandra’s media entities which have

recorded exceptional performance over the last decade? Deepti Chaturvedi of foreign brokerage

CLSA states that IL&FS crisis in September made refinancing of debt difficult as a result of

which Essel Group decided to sell up to 50% of their stake in Zee Entertainment. “Pledging on

Zee’s share is not new, though recent rise in pledging levels coupled with fall in stock price have

resulted in risks of pledges being invoked,” says Chaturvedi adding that post the price fall, the

total market value of promoter holdings has equalled its pledge cover as on December last year.

With Chandra facing the daunting task of reducing the debt and battling allegations of

corruption, investors are also gripped with fear that the shares pledged against loan will lose

value if situation doesn’t improve. Since Essel’s stake of 59% in Zee Entertainment is pledged as

collateral to borrow money from creditors, shares are at risk of being seized or dumped if the

price falls. According to the management, January 25th’s stock crash triggered various covenant

breaches but the group reached an understanding with 97 percent of its lenders. “There was fear

in the market that probe agencies might launch an investigation into the money laundering

allegations and as the prices start to plunge, the lenders and investors started selling shares which were pledged against loans,” says an analyst from a large domestic brokerage firm.

Over the last two months of 2019, promoter entities have sold shares worth Rs 46 crore in Zee

Media Corporation, which includes news division. They have also sold shares worth 884 crore in

Zee Media Entertainment.

However, even as controversy and concerns swirls around Chandra and his group, the two listed

media entities have delivered strong performances in these turbulent times. Zee’s reported strong December quarter results with revenue growing by 17.9% year-on-year to Rs 21.67 billion as advertising revenue and domestic subscription revenue expanded. Advertising revenue grew 22% yoy due to heavy advertising spends by corporates, success of Zee’s channel portfolio and growing digital business.

Similarly, Zee Media Corporation too reported topline growth of 22.7% YoY to Rs1,942.2

million led by strong performance across national and regional channels aided by election

tailwind and delayed festivities. In the national bouquet, Zee News witnessed a yield increase of

3% QoQ while Zee Business’ market share during stock market hours increased to 35.5% in

3QFY19. “All the national channels except WION (global channel) namely Zee News, Zee

Business, and Zee Hindustan are witnessing steady traction both in terms of yields and average

time spent,” says Jinesh Joshi, a media analyst at Prabhudas Liladher.

But Chandra’s print business isn’t performing as well as the TV segment.

Owned by Diligent Media Corporation Limited, an Essel (Subhash Chandra) Group company, DNA had its fair share of disappointment this year as two of its editions shut down in Delhi and Jaipur. Chandra’s debt woes cannot be linked to DNA newspaper decision to cut cost. A media analyst, who has been tracking print media for five years, claims, “The editions were shut not due to the rising debt at promoter level but instead the curtains were brought on it because the DNA newspaper isn’t able to generate revenue. The news print cost as well as competition is rising making the editions unviable.”

Media reports also suggest that a major reason behind the shutting down of the Delhi edition was because of the absence of advertisements from the Aam Aadmi Party-led Delhi government. Most newspapers depend on government revenue to bridge the gap between cost and revenue. An absence of advertisements from the state government for a city daily can be a challenge.

While financial TV media entities of Chandra are going strong, the dilution of promoters’

stake is at least expected to adversely impact their performance. “If the promoter who has played a major role in the rise of the channels ceases to have a say in the entities then it’s a cause of concern for the firms. Whether the new management manages to keep up the pace of growth will have to be seen,” says the analyst, who wishes to remain anonymous. And while Sony TV is in talks with Essel Group’s management to buy a 20% stake in Zee Entertainment and several other major players are also in the fray, the uncertainty continues to loom large as of now.