Zee Learn puts deal with Tree House on hold; to review merger terms

Zee Learn Ltd, the education arm of Essel Group, said on Wednesday it has put the proposed merger with pre-school chain Tree House Education & Accessories Ltd on hold and will set up a committee to look at options to salvage the deal.

Zee Learn said in a stock-exchange filing that it will not go ahead with the previously agreed share exchange ratio of 53 shares of the company for 10 shares of Tree House.

VCCircle was the first to report that the terms of the proposed merger between the country’s two biggest pre-school chains, Zee Learn's KidZee and Tree House, were set to be reviewed.

Tree House’s revenue almost halved to Rs 27.27 crore and it sank deep into the red for the January-March quarter as against a net profit of Rs 17.12 crore a year earlier. For the full year 2015-16, its revenue was almost flat at Rs 209.35 crore while net profit dropped around 90% to Rs 6.56 crore.

The firm also disclosed that the accounting estimate of the bad debt of pre-schools that were pending for more than 90 days had changed from nil to 50% and that affected its earnings.

A person with direct knowledge of the deal told VCCircle that Zee Learn and Tree House will come up with a revised plan so that the deal doesn’t face any hurdle from Zee’s shareholders who would not like to give more shares given the abysmal state of financials at Tree House.

Tree House is to be wound up after the deal. Its promoters currently hold 20.54% while public shareholders, including some venture capital investors, hold the rest.

Under the existing merger plan, Essel Group's holding in Zee Learn is to decline to around 38% from 67.33% at present.

Indeed, the proposed merger is yet to be approved by public shareholders of the two firms. Given that the new terms of merger are expected to be less favourable for Tree House shareholders than previously envisaged, the merger may face resistance from them.

It is not immediately clear whether the deal, when completed, will come under the scrutiny of 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. It also runs the second-largest school chain under Mount Litera brand with 87 centres. Besides, it runs 31 vocational training institutes under ZEE Institute of Creative Art and one centre under Zee Institute of Media Arts.

PE-backed Tree House has 636 centres in 96 cities. A majority of these are self-operated while the rest are franchisees. It also offers consultancy services and runs 24 K12 schools that teach from kindergarten to 12th grade. It has been looking to go more asset-light to fire up its flagging business, a strategy it eschewed till recently, but was forced to look at as its financial performance deteriorated. It has also scaled down its operations since September last year when it had as many as 720 pre-schools in 103 cities.

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.

The merger proposal came just months after Mumbai-based Tree House's investors raised concerns over its accounts and operations. In September, proxy advisory firm Stakeholders’ Empowerment Services raised concerns over high levels of trade receivables on the company's balance sheet. It also raised questions over the company’s fee collection and accounting systems.

Shares of Zee Learn rose 0.9% to Rs 28.9 each while that of Tree House climbed 2.7% to end at Rs 61.3 a share on BSE in a flat Mumbai market on Wednesday. Tree House shares have lost around three-fourths of their value since the proposed merger was announced last December. Zee Learn, too, has seen its share price tumble during the period.

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