Pre-school chain Tree House Education & Accessories has decided to merge with bigger rival Zee Learn Ltd, the education arm of media baron Subhash Chandra’s Essel Group, in an all-stock deal.

Tree House’s shareholders will receive 53 shares of Zee Learn for every 10 shares held, the companies informed the stock exchanges. 

Click to zoom

The companies said the reason behind the amalgamation is that they have similar line of business activities.

After the merger, Essel Group's holding in Zee Learn will fall to 36.23 per cent from 61.6 per cent. Tree House will be wound up after the deal. Promoters currently hold 20.54 per cent of Tree House while public shareholders hold the rest.

The two firms had early this month disclosed that they were in talks for a possible merger.

The deal will make the combined entity the largest pre-school chain in India. Indeed, it may face scrutiny from the Competition Commission of India.

Zee Learn operates the country's largest pre-school chain under the Kidzee brand with 1,350 centres, entirely through franchisees, and the second-largest K12 school chain under Mount Litera with 87 centres. It also runs 31 vocational training institutes under ZEE Institute of Creative Art and one centre under Zee Institute of Media Arts.

PE-backed Tree House, which has a net worth of Rs 644.7 crore and annual turnover of Rs 207 crore, had 720 pre-schools in 103 cities as of September 30. Of these, 611 are self-operated while the rest are franchisees. It also offers consultancy services and runs 24 K12 schools.

The merger comes just months after Mumbai-based Tree House faced investor concerns over its accounts and operations. In September, proxy advisory firm Stakeholders’ Empowerment Services raised concerns over high levels of trade receivables in the company's balance sheet. It also fretted over the company’s fee collection and accounting systems. The company has, however, dismissed these concernns.

The company's share price has lost over half of its value since then. This makes the deal cheaper for Essel Group.

Tree House shares came under further pressure after the merger announcement.

The company is backed by private equity firms Omidyar Network, Foundation Capital, Matrix Partners and Aditya Birla PE, among others. It had raised Rs 200 crore earlier this year by selling shares to institutions to finance expansion and cut debt. Its net debt is Rs 30 crore, the company said in a December 1 stock exchange filing.

To support its expansion plans, Tree House has monetised one of its assets that houses its K12 schools by selling land and building with a lease-back agreement.

The firm opened 73 centres last quarter. It had previously said its margins were affected in the second quarter due to this expansion. Its operating margin shrank to 52.7 per cent from 59.7 per cent a year earlier while net margin narrowed to 22.3 per cent from 25.1 per cent.

Tree House posted profit of Rs 60.87 crore in 2014-15 on Rs 207.44 crore as revenue from operations. It recorded profit of Rs 12.74 crore for the July-September quarter this fiscal year on revenue of Rs 57.25 crore. 

Zee Learn reported profit of Rs 9.62 crore on net sales of Rs 121.58 crore for 2014-15. It posted profit of Rs 1.08 crore on net sales of Rs 30.70 crore for the quarter ended September 30.

Shemrock and Euro Kids are the other prominent pre-school chains in India. Shemrock has about 425 centres while Euro Kids runs 884 centres, according to their websites.

Demand for organised learning solutions for toddlers before they enter formal education system has been growing at a swift pace. This makes playschools an area with high business interest.

Leave Your Comment(s)