Wednesday, December 18, 2013

Zee Entertainment : Reason for Backwardation ?

 Zee Entertainment is trading in Normal backwardation for Jan, 2014. 

ZEE Entertainment

The CMP is Rs 284.40  (Here)

In FO Dec 2013 Contract  286.00  (Here)
In FO Jan 2014  Contract  279.60   (Here)

It Implies a backwardation of almost Rs 6.00/-.   Why ?

This backwardation in stock lead me to think about the reasons of backwardation in this stock ?

The reason of this discounting was the expectation of Bonus Redeemable Preference Shares (RPS) (Here). The company has already declared RPS in may and market is expecting a go ahead from the court on 20th Dec, 2013. The date on which its case for issue of RPS is scheduled in Munbai High Court.

It seems logical that, If the court accepts the issue (In any case they will accept, it is the matter of time), the company can very well fix record date in Jan, 2014 and distribute the RPS. But Mumbai High Court Case no (CSPL/695/2013) has listed the matter as (Listed for Final hearing). Looking at past orders of other such cases in different courts, including Mumbai for such matters, I feel that court may have final hearing, but it may give a new date for final order (I have to admit, I am not a lawyer or have legal background, I am saying this based on my experience of analyzing mergers, acquisitions and takeovers of different companies, which also involves regulatory processes). The new date can be after few days or weeks, which may change the calculation of Ex- Date and hence the discounting.

Also I have a different view on adjustment of Corporate action on RPS by NSE on its derivative segment (Here) . It is perceived that since the face value of RPS is Rs 21/- , Which is less that 10 % of stock price of Rs 241/- (22 May, 2013). But I beg to differ that these RPS can be considered as dividend and benefit can be passed on in derivatives segment. Because Though the face value of RPS would be Rs 21/- (Rs1 * 21 RPS), But Its market value may be different because of different expectation of yield and duration of RPS. 

Based on above reason, The exchange may not reduce the amount as face value, but It may close all open position on eve of Ex date and issue fresh contract on Ex dates as in case of De- mergers. I again have to caution , that it is my view and exchange may look other way. Also there is precedence in past, where exchanged has looked the other way by giving the benefits as dividend (Issue by Bonus Debentures by Hindustan lever in 2003)

The Discount in Zee Entertainment, is because of perception and I have discussed the pro and Cons of such perception.

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

PS : I intend to take position in derivative segment of this stock.

1 comment:

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