Tree House may merge with Zee Learn as founders part-exit

Zee Learn Ltd and Tree House Education & Accessories Ltd are in initial talks for a possible merger that could make the combined chain of pre-schools twice the size of its nearest competitor.

The education arm of media baron Subhash Chandra’s Essel Group and PE-backed Tree House told stock exchanges on Friday they have agreed to explore options for a possible combination. They didn’t give any details.

Sanjay Shah, chief financial officer at Tree House, told VCCircle that the two companies are looking at opportunities to consolidate and run the pre-school business jointly. “It is a joint consolidation move but the discussions are at a nascent stage now,” he said.

Shah did not specify the nature of a possible deal and whether both brands will continue to exist. "We should have some more details on it in a month's time," he said.

However, an investment banker aware of the discussions said the two companies will likely merge in an all-stock deal and will continue to operate under two separate brands. The banker, who is not involved in the negotiations, did not wish to be named.

The announcement came after Tree House founders Geeta Bhatia and Rajesh Bhatia sold a 9.5 per cent stake in the company, or a third of their holdings, on Thursday to a bunch of private companies. As of September 30, Geeta and Rajesh Bhatia together held around 30 per cent of Tree House.

The duo sold the shares at Rs 200.5 apiece for a total of around Rs 80.2 crore ($12 million). The shares were picked up by Decent Financial Services Pvt Ltd, Nishu Finlease Pvt Ltd, Arch Finance Ltd, Prism Commodeal Pvt Ltd, Plasma Commercials Pvt Ltd and Pixel Mercantiles Pvt Ltd.

Mumbai-based Tree House runs 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.

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.

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.

In a separate development, VCCircle reported in October that CERESTRA Advisors Ltd, the real estate PE arm of Religare Enterprises Ltd, was looking at a deal to acquire some realty assets associated with academic institutions run by the Zee Group. The deal value could be in the range of Rs 300-350 crore, people aware of this development said at the time.

Shares jump

Shares of the two companies jumped after the announcement in a Mumbai market that fell 1 per cent. Tree House’s shares touched their 10 per cent upper limit while the Zee Learn stock rose to a one-year high in morning trade before paring gains.

Tree House shares ended the day at Rs 222.60, giving the company a valuation of about Rs 942 crore ($141 million). Tree House was until recently the most valued listed education services company in India, but heavy selling by investors has deflated its value by nearly half in the past three months. However, shares of the company have jumped 45 per cent in the past four trading sessions.

Shares of Zee Learn closed 3.3 per cent higher at Rs 43.95 on Friday, taking the company’s market capitalization to Rs 1,407 crore ($210 million). The company, which is about half the size of Tree House in terms of revenue and even smaller in profits, is now the most valued education services company.

Tree House’s struggles

Tree House has been battling investor concerns  over its expansion 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 concerns.

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.

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