>SPECIAL SITUATIONS: ZEE/ ZEENEWS DEMERGER (AMBIT CAPITAL)

The opportunity
Swap ratio for the proposed demerger of ZeeNews' regional entertainment business (R-GEC) to Zee was announced on 29th October. The swap ratio is 4 shares of Zee for every 19 shares of ZeeNews. Post the demerger, ZeeNews will remain a listed entity with its businesses other than the R-GEC.

The ratio of market prices of ZeeNews to Zee has thus far traded at a premium to the 4:19 ratio thus implying some value for ZeeNews ex R-GEC. However, of late, the ratio of CMPs has come to trade at the demerger ratio itself thus implying that if one makes a switch from Zee to ZeeNews, then one gets the ZeeNews business ex-REC for free. Even based on conservative assumptions on ZeeNews' residual businesses' valuation, we believe that one should be looking at risk-free returns to the tune of atleast 10% by making this switch.

For arbitrage players buying ZeeNews in cash and shorting Zee futures in accordance to the swap ratio can be a fruitful way to make use of this opportunity.

Valuation of ZeeNews We have tried to value ZeeNews ex R-GEC very conservatively (ZeeNews is not in our fundamental coverage universe) . The valuation assumptions include an FY10 EV/ Sales multiple of 1x and a debt assumption of 80 crs for ZeeNews ex R-GEC. Even with this conservative approach we arrive at a price of Rs. 5.56 for the residual ZeeNews business.

Roll Cost for Zee Entertainment For an arbitrager who buys ZeeNews in cash and shorts Zee futures, roll cost becomes an important consideration in determining the overall returns. Looking at the history of last two years, Zee has tended to roll at a premium on an average and thus the roll cost does not seem to be a concern. A discount in the future however can be a potential risk.

Expected Timelines Based on timelines of the previous Zee demerger in 2006, this process of demerger can be expected to be over in the next 6-7 months.