Sent another reminder to the company regarding the merger related documents and following is the response I received,
It will be uploaded soon.
Not sure what is āsoonā in Tree house terminology.
Anyways, coming back to analysing the recent events and what is ailing the stock. Post the merger announcement the stock has tanked more than 50% and I do not see any thing that has changed drastically w.r.t company fundamentals. Given that the merger ratio is 5.3 stocks of Zee Learn for every Tree houseās (TH) stock, at todayās stock prices, TH is trading around 40+% lower than what one would get if the merger process goes through (Rs.35 per share for Zee, equates to Rs.~185 for TH post merger, where as todayās price for TH is Rs.~130).
Why could this be happening (following four reasons I can think of) ?.
- FIIās are major share holders in TH and they could be selling. But then why would one sell for a 40+% discount (@ todayās price), if they know six month down the line they can get ~45% more. Is there something big investors (FIIs) know, which we retailers donāt. We should know the FII holdings once TH releases the new share holding information in sometime.
- When the merger was announced as everyother retail investor, I too was not happy and felt TH share holders were not treated fairly and merger ratio was beneficial to the Zee Learn more than TH. This was also highlighted in some of the external articles posted in this thread (refer to moneylife article link in the post above). But given the recent TH share price fall, I would now vote FOR the merger (whereas I was inclined to vote AGAINST when the announcement was made). So I do not know if something is at play here in keep the TH price down. If I were Zee Learn mgmt, I would buy as much TH shares as I can (if SEBI allows this during the merger process), esp at lower levels (thereby controlling the merger process)
ā¦Just trying to highlight there may something more than what we know !! ā¦so, Are we being forced to vote FOR the merger by controlling the price of TH ? - Zee Learn is richly priced and so one expects its price to go down post merger (to ~Rs.25 levels which would justify current TH price). If this theory is right, why would it stay around Rs.35 levels even in the recent market carnage ?.
- TH was cooking numbers so for and this merger gave them an opportunity to hide it. If this was the case, TH mgmt should be behind bars !! ā¦But then as a retail investor I would be happy to get some value for my shares than seeing it go close to 0 (and so I MUST vote for merger
)
)As the money life article concludes,
āmaybe the promoters of both the companies know something about Treehouse that outsiders donātā
@varadharajanr, Were you able to find anything more ?
I had the following concerns
- why did the promoter need Rs. 160-240 Cr. for a short time (less than a year) just prior to QIP at a LTV of 50% which is par for course for share pledges ? what was it used for ?
- How was he able to get the money to bring down pledging to zero so soon ? who gave him the money to retire this ?
AFAIK, once merger has been announced, i do not think one can acquire shares in the other company - as it becomes āinsider tradingā but then allied/sister companies can.
he is a first generation entrepreneur with no other business ostensibly - so where did this money go and how did it come back so soon ?
I am not going to suggest any hypothesis here since such things, I have discovered in the past, evoke strong emotions and my inbox get filled with hate mail 
It is always āenlighteningā to learn from u:)
Thanks for the good write-up.
On point 3 though, I wonder how things will turn out. Considering everything is fair and no cooking of the books, then the merger will result in Zee Learn allot close to 22cr shares for TH holders. This will increase total shares of Zee Learn from current 32cr to 54cr shares.
TH FY15 net profit was 60cr and Zee Learn Profit is 10cr. The EPS will be 70/54 ~ 1.3.
The question at what PE the shares will quote after merger? If shares are going to trade at ~25 then will the current PE of Zee Learn from 100 drops to just ~19? If so, why are the Zee Learn shareholders now valuing Zee Lear at so high ~100 PE? What really changes from the Business side if there are no issues with TH? It should become better and should trade higher.
But as we are seeing in market, the stocks are tanking. That means something is not correct and point 4 might be more true and definitely managements have to come out and disclose fully. Zee Learn shareholders may be in more pain moving forward! 
)
I entered TH when it fell from 250 levels on pledging concerns. Exited it after the merger details were announced. Not that I anticipated the fall , I did not want any part of the deal.
While the deal was unfavourable to TH, it had a deeper malaise , a deeper rot to it.
ā¢ SHORT SELLING :
When TH had its steep descent from 250 levels, the volumes traded were abnormally high, hitting LCās with precision, often in a few minutes of trading, triggering Bhatias margin calls on a daily basis . In that period there was no FII selling , there was no fund involvement, reputed brokerage firms(HDFC, chola,more) still believed in TH , there was no overall market correction, in fact it was awash with cash.
So who was selling it ?
The delivery percentages, lack of bulk deals and the abnormal volumes did not match. The logical answer is short sellers. TH is not in F&O, but short selling* is a legal practise in the spot market.
- Short selling - Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is motivated by the belief that a securityās price will decline, enabling it to be bought back at a lower price to make a profit.
In TH short sellers case , making a profit was not the criteria.
A confirmation of Short selling was evident, when some bargain hunters who had bought the TH stocks during the crash did not have the delivery of the stocks at the end of the day. This was posted by a few MMB users.
Short selling is a allowed practice, for the sake of price discovery. But short selling on this scale cannot be perpetrated by all . There are grave risks to doing it, when the stock moves in a opposite direction they lose a lot. For such a scale of operation, you need someone with significant financial clout backing it.
I wonder who could mount such an exercise ? And who would hope to benefit the most from it?
ā¢ FACE LESS RESCUERS
With lenders breathing down bhatias neck, a few " rescuers " purchased Bhatias 9% stake at Rs 200.5/- in a block deal. These rescuers were unknown,faceless identities. This immediately provided a breather. The news on " talks of consolidation " immediately followed. No one had enough time to ask, who exactly these faceless firms were? Or their money source.
ā¢ Selling of shares
The talks on consolidation , immediately took TH share price to above Rs 230. At this price, one of TH directors other than Bhatias, sold his stake . This happened much much before any of the " consultants " came up with the merger swap ratio. Is that called insider trading ?
So is Mr Bhatia innocent? Whatever he did is to protect his & his families interests ? He was pushed into a corner where there was no way out? I donāt think we will ever know the real answer it or to any other questions .
What I know is thisā¦the rights of small investors has been trampled upon with utter disdain and squeezed shut under big boots without even a whimper.
This post has assumptions which cannot be backed by evidence, at least not by me. If this crosses VP guidelines, please flag it / delete it
I too sent a request and have been checking the website for a Valuation Report, but no leads yet. The THEAL management seems to be running away from answering investors concerns, which is a poor sign.
Situation 1
The ambiguity here is if THEAL has cooked books or not. If company results were fabricated, then obviously it makes sense to go for the merger with Zee at the merger ratio as @sivakkri has suggested. However, we do not know this yet. Is there a way we can look at annual reports and find out? I am not an expert in forensic accounting 
Situation 2
If the books are not fabricated, then at current price level of Rs 140 for THEAL, a 5.3 merger ratio LOOKS favorable considering Zee is trading at Rs 35, but it is not. The value of THEAL is not Rs 140, it is atleast Rs 300! Plus it has significantly better fundamentals than Zee! There has been a 40% - 50% decline which needs to be factored. @sivakkri would you agree to it? In his scenario, merger ratio is not favorable and neither is the merger.
Situation 3
What would a bigger company do if there is a new kid on the block who outperforms on their own turf? First step will be to tighten the ship and run a better business. What if this is not possible since bigger wheels are harder to move or if there is a shorter routeā¦like a merger by forcing Bhatiaās hands using his weakness of pledged shares?
There is a possibility the shares of THEAL have been dropped to make the merger ratio look favorable for THEAL investors so we all vote in favour! I read a few messages (might be speculations/rumours) which mentioned that Bhatia was ācorneredā to sell his stake at Rs 200/share. Zee does have the muscle to shake THEAL, thereby executing a coup.
Anyways, only time will tell, but surely there is more to THEAL/Zee merger than meets the eyes.
From a strictly business standpoint, the fundamentals of THEAL seems to be intact as was mentioned by @sivakkri. This ride is bumpier than I had signed up forā¦
Disclosure: Invested
Disclaimer: Not Invested / Never was. Did a quick check out of curiosity seeing the last 5 to 10 posts. This super quick check is in no way conclusive. This is not a recommendation either ways. Your own money is on the line so do your own research.
Based on 9 Years Screener.in data.
Cumulative Sales = 633 cr
Cumulative PAT = 171.42 cr
Cumulative CFO = 99.30
Cumulative CFI = - 496.6 cr
Cumulative FCF = - 397.32 cr
cCFO / cPAT = 0.58
cFCF Margin = - 62 %
The above data and calculations seem to suggest severe cash flow issues at the company.
Not sure if cash flow is the best metric to see in these kind of business at this stage. It is growing healthily, and capex intensive. If THEAL wanted to improve free cash flow margins, then it would have never been able to grow that fast.
I am looking for good model companies who have these kind of capex intensive long gestation business model. There are many companies such as Narayana Hrudayalaya, Talwalkars, PC Jeweller etcā¦ As I understand the model of these companies is relying on own hospitals/stores/gyms/schools to build their business. They do this primarily to keep high profit margins, but at the cost of heavy capex.
In case of THEAL, it has gone on binge to look for equity financing to run operations. For equity financing all they wanted to ensure was good growth curve on topline & bottom line metrics such as revenue and profit. Now we can ask the question if this is the right way to grow, but I donāt know if there is any other way. I remember reading, his school operations takes 3 years to generate free cash flow.
So the only way these companies operate is through outside financing. As we can see here, THEAL promoters holding has consistently come down as they keep selling equity to raise money. Esp. In case of THEAL they have been quite liberal in selling an equity stake at the cost of maintaining growth.
Zee learn CEO resigned. Paving the way for Rajesh Bhatia to take the CEO role once the entries are merged ?
Based on the news articles I had read back in Dec 2015, Bhatia was helmed to take over the pre school business after the mergerā¦it seems this move formed a critical part of Zee Learns game plan. Could this mean THEAL was growing in an authentic manner without cooking any books? If Bhatia was a crook, any reason why Zee Learn would put him at the pinnacle after such a huge merger?
Documents related to merger uploaded. Do we have anyone in VP who can evaluate these reports ?.
At laymenās view, it looks to me that the valuations were decided based on future earnings than how the companies performed in the past. Is this a norm ?. Also I do not see any details at all (lots of ambiguous legal clauses).
The āValuation Reportā is a big fat JOKE! Just legal words and no data or facts to support the ratio!
They mention the methods used for valuation, namely the āIncome Methodā and āMarket Priceā method, but never give out any details used to arrive at the merger ratio. Under the Income method, they claim to use āfuture earningsā to arrive at āfair valueā (misnomer) ā¦but these future earnings can easily be manipulated by the management.
Also, If you look at value of ZLL and THEAL shares from Nov,2015 to Dec, 2015, the shares of ZLL spiked by 21.21% while THEAL plummeted by around 25%. The valuation report was prepared on 23rd Dec and shares of ZLL and THEAL were of equal value on 22nd Dec (ZLL = Rs40 and THEAL = Rs 200). These events look fabricated to reduce the value of THEAL during the merger process.
The water is intentionally made muddy by the management so retail investors will get lost in the legal ambiguity, while the business facts remain under the carpet. Can we ask for financial details used in the merger ratio?
If the merger does go through, Bhatia is still at the helm! So its not like the issue of mediocre management will be solved. If the merger fails, we are still stuck with Bhatia!
Catch 22 I say!
please donāt value the co on last pries today rateās are fact .
stock may go up ā¦
1.big investor will favor zee learn good for long term .
2.it will make new co biggest in education and strongest to.
3. management will give positive direction to market only after merger .
4.short term may be bad or volatile ā¦long run is on
The valuations donāt make sense. It is all based on their perception. Why the company hasnāt given future income statements which are used for coming up with the ratio? They have just provided some theory on how they have arrived. Where are the real numbers?
There is no record of the FY17 and FY18 earnings. To arrive at this valuation, the future earnings of Tree House seem to be projected extremely low, so the ZeeLearn eventually is at a premium. What makes TreeHouse future so bleak?
@Lynchfan
I have checked with many other companies to find the validity of this statement.
Many of them has got 5 year PAT greater than 5 yr Operating Cash flow. But yes, the difference is huge here (60crs).
- Does that mean all of them is expanding with the help of debt?
- Or the huge difference of 60 crores is the matter of concern?
Thanks
As I understand it, the swap ratio decided for the merger between Tree house and Zee Learn is 10:53 and at CMP of 121 for Tree house and 34.5 for Zee Learn, price difference works out to be 1210:1828. Now I understand that for those shareholders holding Tree house at higher prices the merger is quite unfavourable given the fact that Zee Learn seems to be quoting at very high valuations but with such a sharp fall in Tree house, doesnāt it make more sense to buy Tree house barring issues regarding aggressive accounting, pledge issues etc.?
Also could anybody please explain the process of pledging the shares in detail? Is there any registry maintained for pledged shares? How would lenders liquidate the pledged shares incase of insufficient margin as there is huge dependency of one lenderās action cascading down to others and creating chain reactions etc.?
Thanks,
Aksh
I went through the earnings. Summarizing my understandingā¦ May be not fully correct. Welcome feedback from anyone who is still following this scrip!
On the expense side everything has gone up and naturally profit is down significantly by more than 50%. Not clear how the trend will be in future. Also, there is no clear explanation available on why the numbers are bad other than taking they have a high number of schools opened and employee cost is high because of this. No explanation I could find on the increase in other expenses.
Though I have mentioned issues with the company earlier, the stock is beaten to death now. From a pure net-net valuation, is the company a buy at this price provided we discount its growth potential to 0?
The company has 40Rs/share worth cash.
If a company stops growing, its working capital requirement to run existing operations will be easily sufficient. With Quick ratio > 8, it is easy to run operations and generate a yield of close to 25%. Its ROCE will also be high as it stops investing in growth and starts trying to generate more out of existing operations.
The stock enterprise value is ~ 275cr. Company EBIT 70cr with conservative estimates. 70Cr per/annum for a 275cr business looks good? .
The risk of merging this with Zee Learn will change the balance sheet equations though. The valuation will get adjusted to a different level and numbers may not be that cheap.
The one way fall in the stock price doesnāt seem to be inline with the fundamentals of the company and more appears to be some sort of manipulation. The fact that promotersā stake is low, most of which is pledged and probable merger with the zee learn raises these doubts even more. There is little doubt that minority shareholders are taken for a ride in this game.
Yes, the steep fall really calls for reason. I am really curious to know what kind of manipulation might a company do? Can experts throw more light using any historical evidence? Are there any companies faced similar situation and did manipulation and got exposed?
As I see from shareholding pattern the big investors are still intact. They havenāt sold major shares. The counter is now, though flooded by many small financial companies who are trying to take short term advantage. I am sure recent buys from
Date Company Client Tran Qty Traded Price
03-Dec-2015 Tree House (BSE) PIXEL MERCANTILES P LTD BUY 495990
03-Dec-2015 Tree House (BSE) PLASMA COMMERCIALS P LTD BUY 510010
03-Dec-2015 Tree House (BSE) PRISM COMMODEAL PRIVATE LIMITED BUY 524000
03-Dec-2015 Tree House (BSE) ARCH FINANCE LIMITED BUY 1025990
03-Dec-2015 Tree House (BSE) NISHU FINLEASE PVT. LTD. BUY 950010 200.50
03-Dec-2015 Tree House (BSE) DECENT FINANCIAL SERVICES PVT LTD BUY
arenāt for the long term. But still the current price of 82Rs is way lower than what the fundamentals of the company holds. Even if they write off their whole K12 business, the company is worth much more than current market cap.