India: Tree House investors get a raw deal on pre-school chain’s merger with Zee Learn

Visual from Tree House website

Tree House Education and Accessories Ltd, the company which was perceived to be in a sweet spot until recently due to steady growth and high margins, has cut a deal in distress. The stock lost 5% on Thursday after the company said it is merging with Zee Learn Ltd, which lost 1.8%.

Tree House shareholders will receive 53 shares of Zee Learn for every 10 shares. The pre-deal close price gives Tree House shareholders a 5% premium (10 shares of Tree House were worth Rs.2,062; 53 shares of Zee Learn at Rs.2,180). As the correction in the share price suggests, investors have been taken aback by the merger terms.

Though in similar businesses, the two companies are in different baskets. Tree House shares have a face value ofRs.10, Zee Learn Rs.1. Further, Tree House is not only growing faster but it also makes far superior margins—they stood at 59% in the first half of the current fiscal year, compared with Zee Learn’s 21%. As a result, revenue to net profit conversion is far better at Tree House. Zee Learn business is franchise-driven. Tree House is mostly driven by self-operated preschools, as a result of which it has a high capital base. But that has not been a bother as its balance sheet has negligible debt (net of cash).

As a consequence, Tree House used to command good valuations—it was trading at 27 times 2014-15 earnings per share at June end. Zee Learn was trading at even higher valuations but that was due to the extremely low earnings per share. That aside, as concerns about the promoters’ pledge of shares and receivables situation emerged, Tree House shares halved from July. Zee Learn shares gained about 8% during the period.

Even as the promoters got back most of the pledged shares and clarified about the receivables situation, the stock did not recoup the losses. It is in this context that analysts are questioning the deal. One analyst said Tree House could have waited for things to settle. Another said the deal raises red flags as Tree House was not able to extract favourable terms despite superior financials.

According to Cholamandalam Securities Ltd, the merger valuation is significantly lower than what the company received in recent fund-raising activities.

Whatever is the reason, if the reported financials are to be believed, investors who kept the faith got a raw deal.

“We believe that the swap ratio is unfair to minority shareholders of Tree House,” Cholamandalam Securities added.

Also Read: 

India: Venture-backed pre-school chain Tree House exploring merger with Essel Group’s Zee Learn

India: Karadi Path Education raises $2.3m from Pearson, Aavishkaar

This article was first published on Livemint.com

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.