The conversation between two friends, Arjun and Krish, who are interested in the stock market:
Arjun: I have been wanting to invest in Education sector in India and I have been exploring stocks in this sector. I am analyzing Zee Learn Ltd. It runs Kidzee (preschool), Mount Litera (preschool and K12 school network), Zee Institute of Creative Arts (ZICA, classical and digital animation training academy) and Zee Institute of Media Arts (ZIMA, TV, and film training institute). I have looked into their website, company presentation, financials and annual report 2015. What do you think about Zee Learn Ltd? Do you think it’s a good buy?
Krish: You know me; I will not tell you if a particular stock is a good buy or not. You will have to do your own analysis. Investing based on borrowed conviction will not do good. You should also analyze Tree House Education and Accessories Ltd if you are analyzing Zee Learn. Tree House is getting merged with Zee Learn Ltd subject to approval by shareholders, creditors, and regulatory authorities.
Arjun: That’s a good point. Thanks. I will analyze Tree House as well. By the way, what is the share exchange ratio for the merger?
Krish: If the merger is approved, every 10 shares of Tree House will fetch 53 shares of Zee Learn. Refer Zee Learn’s outcome of board meeting dated 23rd December 2015 for more information.
Arjun: Is there some information to understand the valuation at which Zee Learn is buying into Tree House?
Krish: You could go through this article – Merger with Zee Learn: Tree House investors get raw deal
Arjun: The article indicates that Tree House investors did not get a good deal, which may be interpreted as – Zee Learn shareholders got a good deal. By the way, I noticed that as on 19th February 2016, current market price (CMP) of Zee Learn is 30.7 and that of Tree House is 81.05. Tree House shares have fallen drastically from around 200 level to a low of around 75 level from the time the merger was announced. Assuming that the merger is approved, how does the math work out to buying Zee Learn vs Tree House?
Krish: Every 10 shares of Tree House will fetch 53 shares of Zee Learn subject to approval. 10 shares of Tree House at current market price (CMP) of Rs. 81.05 will cost Rs. 810.5 whereas 53 shares of Zee Learn at CMP of Rs. 30.7 will cost Rs. 1627.1. That’s a price discount of Rs. 816.6 (1627.1 minus 810.5) which is 49.8% discount.
Arjun: I did the math again and I see that you are right. So, buying Tree House shares could provide 50% discount on Zee Learn shares. In other words, Zee Learn shares can be bought indirectly at 50% discount by buying Tree House shares. Mathematically, it’s like buying Zee Learn shares at around Rs. 15 instead of buying it at its current market price of 30.7. If I buy into Tree House shares and if the merger is approved, it would result in 100% profit if Zee Learn is quoting at Rs. 30 after the merger is approved.
Krish: You shouldn’t take decisions based on the just mathematical assessment. You will have to do more analysis.
Zee Learn Risk View
Arjun: By the way, what are the risks involved?
Krish: The risks that I see are –
- Merger may not be approved
- Zee Learn shares may fall by more than 50% from its current market price.
There could be other risks. Let me know if you can think of other risks.
Arjun: What is the probability of these risks occurring?
Krish: No Arjun, I’m not going to answer such questions. You will have to assess the probabilities of these risks yourself and you will also have to see if there are other risks involved. By the way, it’s not about the math alone. You will have to analyze both Zee Learn and Tree House qualitatively as well as quantitatively. You will also have to do some thinking on whether or not there would be a negative impact on Zee Learn, due to the merger.
Arjun: Looks like I have quite an amount of homework to do tonight. I will analyze both the companies.
Krish: Don’t get too excited by the thought of 50% discount. Note that the mathematical discount of 50% is based on closing price of Zee Learn and Tree House on Friday, 19th February 2016. Also, don’t let this thought of paper discount and paper profit bias your analysis of both the companies. If you are not convinced with the businesses of Zee Learn and Tree House or if you feel that the merger may not do good for Zee Learn, you should explore other stocks in the education sector.
Arjun: Okay. Thanks to my friend!
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