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Zee Telefilms (Zee) is taking a stake in Padmalaya Telefilms in an indirect manner. The share of Padmalaya Telefilms has been rising in anticipation of strategic stake by a media major. Padmalaya Telefilms is issuing 2m shares (16% of the company’s post issue share capital) to Padmalaya Enterprises, a private company of the promoters, at a price of Rs142.2 per share. Zee will fund this transaction by taking a stake in Padmalaya Enterprises. Subsequently, Padmalaya Enterprises would make an open offer to acquire a further 20% stake in Padmalaya Telefilms (0.21m shares) at a price of Rs148.5 per share. The funds would once again be provided by Zee. The total outflow of fund from Zee would be Rs59.6m.

After the deal, Padmalaya Enterprises would hold 51% in Padmalaya Tele (6.375m shares). Out of the above 2.25m shares would be transferred by Padmalaya promoters to Padmalaya Enterprises and Zee would hold 64.3% in Padmalaya Enterprises. For Zee the deal makes sense because it gets control of a regional production house and Zee has been increasing its presence in the regional TV channel market. Zee has also made a foray into production of Hindi films and the same is synergistic with Padmalaya Telefilms foray into Hindi film market.

Padmalaya Telefilms has been looking for a strategic partner for a long time. The company has a good business model with a mix of regional and Hindi serials and multimedia. The company’s recent foray into Hindi movies has also met with reasonable success. The deal prima facie is good for Zee as it would need content for its regional channels. However, since Zee is increasingly outsourcing quality content from providers like NDTV and Balaji Telefilms for its flagship channel, what was the need to take a controlling stake in Padmalaya Tele?

However, the indirect manner in which Zee is acquiring control of Padmalaya Tele will likely raise a few questions. For example at least till sometime back Vidyut Investments, the Ranbaxy group company in the news due to its affiliations with KP, and Niskalp Investments, Tata Finance subsidiary, had large investments in Padmalaya Tele. Is it likely that the promoters of Padmalaya Tele bought over the shares from these companies when they were cleaning up their respective balance sheets and the same shares are now coming back to Padmalaya Enterprises? What is the consideration for which the promoters of Padmalaya Tele are transferring 2.25m shares to Padmalaya Enterprises? Again why did Padmalaya Tele not make the preferential allotment directly to Zee Tele and then Zee make the open offer? Zee has often been looked as a company with lower than desired level of transparency and corporate governance. This looks to be one more such deal that will foster belief of non-transparency and lack of corporate governance.

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