Tree house education and accessories ltd. - Potential candidate for improvement in RoE

Stock Opportunities
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@sivakkri You have presented some good information. Thank you for the diligence.

From a minority shareholder standpoint, we have 2 main issues to evaluate which determines our future interest in this company.

1) Is the merger with Zee fair to Tree House shareholders?

Financial comparison shows Tree House is stronger than Zee in terms of almost all key metrics like ROCE, ROE, OPM, NPM, PEG, D/E. Most notably, Tree House has been able to improve its metrics with time, which is always a good sign.

OPM for THEAL have been >50% and NPM >20% for past 5 years. Same metrics for Zee have been dismal (-ve margins if you take past 5 year average). Zee reported losses from 2012 through 2014 for 3 years indicating a poorly operated business.

Even though Zee has more branches, THEAL has a better and more profitable business model of using self operated school. Plus, THEAL was getting better at copying its best practices and making money from a new center within 1.5 to 2 years. Zee hasnā€™t paid out dividends in the past 6 years while THEAL has been paying and increasing dividends since 2012. Clearly, Zee management is not shareholder friendly.

In the view of business comparison, it seems THEAL shareholders got the shorter end of the stick in this merger. Zee management might have flexed its muscle to make the merger go through and convince the THEAL board. Question arises why would THEAL board allow when it is clear THEAL was undervalued inspite of being a better business than Zee.

It is critical we get hold of the Valuation Report that was used to determine the merger ratio!

Also, check out this video of Rajesh Bhatia in interview with NDTV: https://www.youtube.com/watch?v=PJs38DRE74E
It seems he was dodging key questions on increasing shareholder value!

2) Will the merger of THEAL with Zee improve the overall business and create shareholder wealth in the long term?

  • Pros:

As a THEAL shareholder, I believed its biggest competitor was Zee and it bothered me that this might impact its growth and/or pricing power. In conversation with a few parents, they had similar views about both the brands and their decision to select a school would mostly boil down to cost or convenience. The merger eliminates this competition and might prove to be beneficial.

THEAL might be able to deploy its operational practices to make Zee profitable.

THEAL can operate Pre School business and Zee can operate K12 business and both can do what they are good at, which can increase profits.

  • Cons:

Zee management might influence THEAL operations making it less profitable. After all, bad habits are easy to catch than good ones!

The management might focus more on improving Zee operations over the next few years, thereby compromising on growth. Expansion might offer more profits than cost reduction.

Zee management is not as shareholder friendly and this might rub off to the THEAL business.

My views
Overall, the merger is not the worst news even though there are things that can go bad. The positives slightly outweigh the negatives from a THEAL shareholder standpoint.

My current concern is getting shortchanged as a THEAL shareholder in the merger and how we can approach management or SEBI to rectify the same.

Any suggestion to address this issue will deeply help.

Thanks.
Kunal

127

Less than a year after you do a QIP at Rs. 440/-, you hand over the company to someone else at 50% of the price -itsā€™ not like this option with zee was not an option last year. and you claim you have a lot of cash on books and you choose to merge it with a company which is starved of cash at a ratio unfavourable to your shareholders.

Zeeā€™s own governance standards are not the best and news on street is that subash chandra through essel finance does a lot of promoter financing and not always against shares. Is there something more than what meets the eye ?

I am trying to dig deep to find out.

5 Likes
128

This deal was undoubtedly not in favor of Tree House shareholders including the Bhatias. Sequence of events:

  1. SES accuses of Tree House of manipulating sales
  2. Tree House comes out with clarification on debtors (by the time of which shares have already tanked 30%)
  3. Rumor spreads that lenders have dumped pledged shares in the market leading to collapse in stock prices
  4. Promoter once again comes out in clarification that it is not the case.
  5. Zee acquires 10% of Tree House when Bhatia sells stake to reduce pledging
  6. Zee merges with Tree House

Something doesnt smell right for sure.

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With the deal so much skewed against the Tree House shareholders, there definitely seems to be something wrong with books. 9 months back Tree House market cap was ~2000cr with shares quoting around ~400 and Zee Learn 700Cr with shares at ~28. Obviously Tree house was much bigger in terms of everything market cap, net worth, cash on books, revenue/profits etc. Fast forward now, Tree house is selling itself at paltry price to Zee Learn with no material changes visible at the fundamental level for outside investors.

There is something behind the smoke which needs to be unearthed before small time investors get clobbered.

131

there is no smoke now it was soā€¦ ā€œthe stock tumbledā€ .why get nervous now ??
when damage is happened . :grinning:
there may be moreā€¦ but for sure it will not be that harshā€¦ it was :wink:
i think new promoter is good then last one .? can infuse incremental cash when needed :grinning:
stock may take some long time to digest this :wink: :wink: :wink:
BUT that how market plays
ā€œBe Fearful When Others Are Greedy and Greedy When Others Are Fearfulā€

discā€¦invested recently. :sunglasses:

1 Like
132

Based on research, it is clear we all agree that THEAL retail investors are the worst hit by this merger ratio with Zee Learn. I am sure some PE investors will be fighting off this merger and might be offloading their shares since it is going forward anyways.

It is clear there was lack of transparency from THEAL management on such a huge step and we need to get that issue fixed either by contacting the Investor Grievances and/or SEBI.

The so called ā€˜Valuation Reportā€™ needs to be shared with the shareholders to understand the merger ratio and we need to obtain it quickly!

@rk1771 Did you get any response from the company regarding the valuation report? We all need to send email to the company and demand it. If you can share what you mentioned in your email to the company management, we will use the same argument in our correspondance.

@sivakkri Any headways in your research?

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I emailed compliance@treehouseplaygroup.net as below but didnā€™t get any update. I dont think they care about our emailsā€¦

Dear Mr. Hardik Desai,

I am a shareholder of THEAL. I read about the merger of THEAL with Zee Learn from your Corporate Announcement in BSE. In the same communication it was mentioned that the valuation report was prepared by SSPA & Co (Chartered Accounts). As a shareholder I would like to have a copy of the same to understand the rationale behind the swap ratio. Please email me a copy of the same.

For me it looks unfair and I still dont understand why you are trying to sell for very cheap price.

Thanks & Regards
Narayana Imandi

134

@raviimandi I will use a similar argument in my email and provide some comparison between THEAL and Zee Learn business fundamentals. Will post here is I get a feedback.

Is there a way we can raise this issue with SEBI? We need to press the management to provide THEAL shareholders with a fair merger ratio and if possible a vote in the decision to merge with Zee.

1 Like
135

yes we have to raise it with SEBI but I dont what is the procedure to do it

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A fair value calculation with even 15% growth gives the valuation with a margin of safety at >35%.

Unless the business growth is reduced to <5%, the valuation currently being worked out doesnā€™t arrive.
Current EPS: 15.56
Growth Rate In the Next:10 Years : 15%
Terminal Growth Rate:4%
Years of Terminal Growth:10
Discount Rate:12%

DCF
Tangible Book Value:ā‚¹107.61
Growth Value:ā‚¹ 180.47
Terminal Value:ā‚¹ 137.91
= Fair Value: ā‚¹ 318.37
= Fair Value + Book Value = ā‚¹ 426

Price: 196.30
Margin Of Safety (without adding Tangible Book Value):
38%

So after growing at > 20% over last 5 years, what made THEAL to realize growth will be less than 10% moving forward and going for distressed sale?

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I send a mail to the compliance officer for copy of the valuation report, however till date no response has been received from the compliance officer. If the company has nothing to hide, why are they not sharing the report?
I will wait for a few days more. If no response comes, I shall be sending a complaint to SEBI and SFIO (Serious Fraud Investigation Office). By not disclosing the reports, THEAL management is forcing us to take unpleasant steps.

2 Likes
138

I just received a reply from THEAL Company Secretary. It reads as,
"Dear Sir,
All documents related to merger will be uploaded soon on Companies Website.
Regards,
Hardik Desai,
Company Secretary"
I am happy that the company responded to shareholderā€™s E-Mail. We shall wait for all documents related to merger to be uploaded on companyā€™s website before taking any step. We hoe that the documents related to merger shall be uploaded soon on the companyā€™s website.

1 Like
139

I got the same replyā€¦

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Hi

Here i have an other thought on this merging process, Now as you have correctly said Treehouse with 700 playschools and 24 K-12 schools was available at a Marketcap of Rs.2000crs and we were very happy to hold it or buy it. No doubt this deal is against share holders of Treehouse and i am one of them. but Now if you see the merged business as on today, you are getting around 2200 playschools and 113 K-12 schools plus some other business of Zee learn + strong promoters in the same kind of market cap. No Doubt that Zee preschools are not doing well, but if they appoint Rajiv bhatia as CEO of preschools and think, if he can be able to turnaround all KidZee like Treehouse atleast improvement of 12-15%on operating profit of all KIdzee , the story will completely turn around and all K-12 of Tree will be well managed by Zee we can see substantial improvements on operating profit. This is just a thought.

Prashant

141

Hi,
I agree,the future outlook for the combined entity of Zee Learn + Tree House will be better than Zee Learn standalone. But will it be better than Tree House standalone?

And THEAL shareholders will be holding the shares of the company which has very less upside potential for share value as it so highly values. The current valuation of Zee Learn at 130 PE and after merger it will be still at 40+. I doubt it will quote at 130 PE after merger!

Also the question is when you are selling something which has good business as TreeHouse books suggests, the basic premise will be to sell at a fair price or even ask for a higher price. Now what is prompting a company such as THEAL to sell itself to Zee Learn at this distress price? Obviously the promoters are taken care and Rajesh Bhatia becomes MD and can continue to run the larger entity. But from pure valuation/business point, does suddenly THEAL believes it cannot continue on its own?

What prompts Zee Learn to be valued so highly? With this merger what THEAL has done is sell itself to Zee Learn at ridiculous valuations which makes Zee Learn promoters get THEAL at a throw away price. For the combined entity to really start earning like THEAL standalone it will take much longer time unless there are some details which makes THEAL cannot run by itself and merging is only saviour! So it is important to know the rational behind these decisions.

2 Likes
142

Dear Prash,

Your comments are very true. but whatever is done is done. still shareholders have a chance to revert the deal. but if it not reverted, than we have to analyse combined business. If you go through a latest presentation of Zee learn, they have even expanded aggressively in last 3 years. they have lots of operating leverage available in K-12 and preschools and they have fixed costs against their operations and as you know preschools take 2-3 years to matured and K-12 schools take more time than preschools. so once they merged, they will have less competition so they may even raise fees by atleast 5-10% yoy. that will make them more profitable.

Comments are awaited.

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here is a link,

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The business outlook wise it will be good and if we are willing to hold for 2~3 years then things might turn out well. But still we will be having the shares at rich valuation. It will be challenge for management to live up to that. From a pure value investor perspective the combined entity is not selling at a discount and there is a very less margin of safety. But again we donā€™t know if standalone THEAL may even survive, which is forcing them to go for this merge. The rational for this merge is still not clear.

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i think how promoters treat shareholder in this specific time , u cant trust them now situation getting worse & worse .
they create all situation to fall stock & raise stock as per there demand
treehouse is now trading with attractive valuation but after merger we going to loose that valuation & getting stuck with this promoter .
only positive if shareholder reject merger & appoint new management
dis already exited position .