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Zee Entertainment: In revamp mode
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Zee Entertainment is undoubtedly in a revamp mood. In the last two months, the company has made moves towards consolidating the group’s general entertainment channels (GEC) under one roof. Under the latest move, the company aims to merge its 50.18 per cent subsidiary, ETC Network, with itself. Here, ETC Network’s broadcasting namely, ETC Music (a Hindi music channel) and ETC Punjabi (a regional entertainment channel), and education businesses will be merged with Zee. Thereafter, the education business will be demerged into a different entity , Zee Learn.

ETC Network’s shareholders will get 10 shares in Zee Entertainment for every 11 shares they hold in ETC; the shares held by Zee will get cancelled. This values ETC at about Rs 230 crore or 26 times its net profit and 3.4 times its sales for the year ended March 2009. The deal valuation looks fair and is in line with the prevailing multiples in the sector.

This move follows the company’s announcement in October 2009 pertaining to the acquisition of six regional entertainment channels from Zee News, which has given the company access to additional 30 million homes and has lead to improved profitability. Financially, even though this acquisition has lead to an 11.3 per cent increase in Zee’s equity, analysts estimate a net accretion of 3-4 per cent to its EPS.

More importantly, the two developments should enhance clarity about the businesses as Zee Entertainment will now emerge as a broadcasting and entertainment player, whereas Zee Learn will focus on the education business .

At a later date, Zee Learn is expected to be listed separately, a move that could lead to some value unlocking for shareholders of the company. Meanwhile, shareholders (of Zee and ETC) will get one share of Zee Learn for every four shares they hold in Zee Entertainment. Zee Learn will have the child education and youth vocational training businesses under its fold. While this business is small in size — it reported revenues of Rs 15.9 crore and EBIDTA of Rs 70 lakh for the six months ended September 2009 — there is huge potential for growth. Hence, its future growth strategy and a separate listing will be crucial in deciding the quantum of value creation, going ahead.

Overall, the advantage of the latest exercise is to improve clarity over the different business verticals. Financially though, there is nothing significant to speak about. ETC Network reported revenues of Rs 66.6 crore and net profit of Rs 8.6 crore, which is just three per cent of the Zee Entertainment’s consolidated revenues and 1.7 per cent of net profit for year ending March 2009.

Meanwhile, Zee Entertainment has been doing well. Recently, its market share (of viewership) has increased and is now around 18 per cent. Its advertisement revenues have also been looking up which along with cost cutting measures have boosted the company’s profitability.

However, at Rs 260, the stock is trading at about 27 times its 2010-11 estimated earnings, where analysts believe there is little room for appreciation in the near-term.

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