Treehouse merger

This could be the beginning of consolidation in education…

During the mid and late 2000s, education was one of the hottest growing sectors. There were the marquee names like Educomp, Everonn, Core Education apart from established players like NIIT and Zee Learning. It was touted as the next big sector in India with a growing young population. Then 3 things happened that changed the fortunes of the education sector.

Firstly, some of these companies focused too much on domestic models that were focused on school learning. Secondly, these companies took on debt, both rupee and dollar, that was clearly unsustainable in the long run. Thirdly, overcrowding led to stifling of margins in the business where they could not meet their financial costs. Not surprising that most of these marquee names lost nearly 90% of their value in subsequent years. That value loss shows no signs of recovering.

 Treehouse announces merger…

 It is in this background that the news of a likely merger between Treehouse and Zee Learning makes for a more strategic insight. Treehouse has corrected sharply from a high of Rs.580 down to Rs.150 before it showed the first signs of bouncing back. Zee Learning, the much bigger of the two, has been languishing for a fairly long time. The merger should be seen less in terms of synergies and more in terms of the urgent need for consolidation in the education space.

Treehouse versus Zee Learning…

In terms of long term debt, both Treehouse and Zee Learning have managed to keep leverage under control. That is the good news. Treehouse is sitting on a large pile of cash that has come from its recent public issue. This cash reserve could serve them well in tough times. Zee Learning is nearly twice the size of Treehouse in terms of revenues but then Treehouse enjoys a much more attractive margin of 57% as compared to Zee Learning’s 20%. Also Treehouse has a PAT that is substantially higher than Zee Learning.

So what will the merger do?

For an industry, that does not have the space for too many players consolidation is the right way ahead. It will lead to rationalization of fixed costs and avoid geographical and vertical duplication. For Zee Learning the cash in the books of Treehouse offers the much needed cushion in an uncertain industry as also its higher margins which will push up the margins of the merged entity. For Treehouse, it gets the backing of a brand that has been around for over 25 years and whose media properties can be effectively leveraged for distributing education. Also the Zee Learning network of 1400 schools is twice that of Treehouse. As a first step towards consolidation, this is a step in the right direction! ©

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