The fall and possible rise of Treehouse

Tree House Education and Accessories Limited is a self-operated pre-school chain. The company is engaged in providing pre-primary education and education support services.

Of late the company’s shares have been battered on the bourses. They have declined more than 66 per cent in the past six months. The stock has been on a downward spiral from the highs of Rs 469 in July 2015 and has touched its 52-week low of Rs 138.10 in early December, last year. There are a host of factors behind this dramatic downfall in the fortunes of the company.

The major reason behind this being the stockholders' anxiety over the financial viability of the company's pre-school expansion plan, after it opened a record number of branches in the second quarter of this financial year. The situation further worsened due to the news related to the promoters pledging their shares with the lenders in order to raise money to increase their stakes in the company. This development spooked the investor community, and consequently many fund houses tanked the shares, eventually  resulting in a sharp fall of more than 46 percent in its share price during the course of one month.

Other reasons behind the dismal performance of the stock have also been the news of a merger between Tree House Education and Zee Learn across an all- stock deal, which was approved by the respective boards in the last week of December. This saw a new round of selling pressure in the stock. This deal is perceived to be in favour of Zee Learn as Tree House Education shares have lost over half of their value since the Q2FY16 numbers. The merger valuation is significantly lower than what the company received as part of some recent fund-raising activities. The company is backed by private equity firms Omidyar Network, Foundation Capital, Matrix Partners and Aditya Birla PE. The deal between the two raises concerns as Tree House was not able to get the favourable terms despite having superior financials.

According to the merger agreement, Tree House’s shareholders will receive 53 fully paid equity shares of Rs 1 each of Zee Learn, for every 10 fully paid-up equity shares of Rs 10 of the former. After the merger, the promoter holding will be 36.23%, while 63.77% will be held by the public.

For the existing investors it is advisable to let the stock stabilise for the moment as there has been a flurry of negative news pertaining to the company. At the moment the shareholders should ‘Hold’ on to the stock and let the merger process go through. It is widely expected that the deal would add synergy to both the companies. Combined entity would make the largest pre-school chain in India. Keeping in mind that the demand for organised learning solutions for children is growing at a rapid pace, this merger would be a promising long term story.