A proxy advisory firm has raised objections to the corporate governance structure at Zee Learn, part of the Essel group, expressing concerns over the company’s capital allocation decision, related-party transactions and acquisition of MT Educare.

“Zee Learn is unable to answer its investors’ questions. Its board and management have not provided the requisite leadership resulting in poor capital allocation decisions, including a botched-up acquisition,” Institutional Investor Advisory Services (IiAS) said.

Plagued with high debt and weakening cash flows, the problems are exacerbated by pledged promoter equity. The board needs to find a solution for the entire business and the company itself. For this, investors may need to wrestle the company out of the promoters’ control and influence, the advisory firm pointed out.

Zee Learn offers education from preschool up to class 12 across India through brands like Kidzee and Mount Litera.
IiAS said acquisition of MT Educare led to value destruction for Zee Learn. “Zee Learn’s investors are not giving it pass marks either for the acquisition or its performance. Its market capitalisation has only eroded over the past few years, notwithstanding the 2018 acquisition of MT Educare.”

In February 2018, Zee Learn acquired a 44.53% stake in MT Educare for Rs 200 crore through a primary fund infusion (31.96 million shares at Rs 62.57 per share). This triggered an open offer to acquire an additional 14.95% stake (10.74 million shares at Rs 72.76 per share) in MT Educare. By May 2018, Zee Learn owned a 59.48% stake in MT Educare for a total consideration of Rs 280 crore.

“From a pre-acquisition high of Rs 1,560 crore in March 2017, Zee Learn’s market capitalisation in January 2020 (post MT Educare acquisition and pre Covid-19) averaged at a little less than Rs 600 crore — a more than 50% erosion in shareholder wealth. For MT Educare’s shareholders, the value destruction is similar — from a high of over Rs 700 crore in May 2016, its market capitalization in January 2020 reduced to a little over Rs. 100 crore,” IiAS said.

The proxy advisory firm raised objections on Zee Learn’s business strategy. “Moreover, both Zee Learn and MT Educare seem to be languishing in terms of their focus on online learning. The recent trends in education show that industry will become more technology focussed. The penetration of Byju, Unacademy, Vedantu and Reliance group’s increased focus on education technology are all testimony of this trend.”

Amidst the Covid-19 crisis, all education has moved to online and will likely spur faster industry transition towards virtual learning. In this context, the company has done little to develop its Robomate platform. Despite having invested over Rs 100 crore (including tablet device and content), Robomate has been losing its presence and student enrolments have declined significantly, it added.

Serious objections have also been raised at related-party transactions by the company.
“Zee Learn continues to undertake transactions with group companies, from purchases of products and services to providing loans and advances. Since Zee Learn has not been reporting positive free cash flows for the past five years at consolidated level, investors fail to see the rationale of extending support to group companies,” IiAS said.

Zee Learn needs to strengthen its governance standards with respect to related party transactions. The Interria transaction and the continuing related party transactions with other entities across the group do not inspire investor confidence. The company’s related party transaction policy needs a revision — it still refers to the defunct Clause 49 of the Listing Agreement, it added.