ZEE Learn had spent Rs 280 crore to buy MT Educare, which was accompanied by write-offs and provisioning of certain assets.

Proxy advisory firm Institutional Investor Advisory Services (IiAS) has observed that the management and board at Zee Learn have failed to respond adequately to questions raised by it on the acquisition of MT Educare. “That a company spokesman addressed the media in response can hardly be construed as a meaningful answer to questions raised,” the firm wrote.

In April, IiAS expressed concerns about the corporate governance structure at Zee Learn, part of the Essel Group, and the asset allocation, related-party transactions and acquisition of MT Educare. ZEE Learn had spent Rs 280 crore to buy MT Educare, which was accompanied by write-offs and provisioning of certain assets. ZEE Learn and MT Educare have not been able to leverage synergies to expand revenues nor control costs — a promise of which was made to investors at the time of the acquisition.

IiAS has also pointed out that ZEE Lean continues to invest in asset heavy businesses — Digital Ventures Private Ltd’s total assets on March 31, 2019 aggregated Rs 690 crore — have low returns and more than half of Zee Learn’s debt (excluding MT Educare) is attributable to the six schoolsowned by them.

“This is in sharp contrast to their belief that having an asset-light model is a critical driver of its profitability, which is, indeed, demonstrated by the profitable and cash generating franchisee-led business model of Kidzee and other pre-school business,” the proxy firm explained. The company proposes to sell the Kidzee business, IiAS said, but Zee Learn has neither confirmed or denied the development, while the management has given unsatisfactory responses to this question in investor calls.

IiAS believes that if the Kidzee business is sold, it will hollow out most of the business, and even if part of the proceeds are used to retire debt, Zee Learn will still be left with asset-heavy businesses that have limited ability to generate strong cash flows. Once again, the promoters’ pledged equity and a leveraged business seems to drive decision making of yet another Zee/ Essel Group company, the proxy advisory firm said.