Zee Learn revises merger terms with Tree House

Zee Learn Ltd, the education arm of Essel Group, has proposed to issue fewer shares to shareholders of Tree House Education & Accessories Ltd, in a revised merger agreement that will create the largest pre-school chain in the country, the two firms said on Wednesday.

The boards of both the firms have approved a revised share swap ratio of 10 shares of Zee Learn of Re 1 each for every 10 shares of Tree House, according to a stock market disclosure.

This comes two months after, Zee Learn decided to put the merger on hold after it disapproved the previously agreed share exchange ratio of 53 shares of the company for 10 shares of Tree House. VCCircle had first reported that the merger terms are to be tweaked.

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

Tree House share price has lost 90% of its value in the past one year.

However, share price of both the firms shot up after the new merger plan was made public, on Wednesday.

“The revised scheme of amalgamation will put to rest uncertainty and anxiety within different stakeholders,” Zee Learn said in a press statement. It added that the company will also help mitigating the recent developments in operational performance of Tree House over the past few quarters.

Mumbai-based 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’s 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.

Zee Learn, on the other hand, posted net sales of Rs 139 crore in financial year 2015-16. Its net profit has increased from Rs 9.62 crore to Rs 15.7 crore during the same period.

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 new merger plan, the promoter’s stake in Zee Learn in is going to decline from 67.33% to 54.37%. This would allow the promoters to retain majority stake. Under the original merger plan, Essel Group's holding in Zee Learn was to decline to around 38%.

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.

Zee Learn operates the country's largest pre-school chain under the KidZee brand with more than 1,500 centres in over 550 cities, entirely through franchisees. It also runs the second-largest school chain under Mount Litera brand with more than 100 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.

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