@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 hasnāt 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