Shares of Tree House Education and Accessories Ltd fell on Thursday after Zee Learn Ltd said it is putting on hold the proposal to merge the former with itself. Zee Learn decided to re-evaluate the deal after Tree House’s March quarter results. It has re-constituted the merger evaluation committee which will suggest ways to salvage the deal.

When the proposal was first announced in December 2015, Zee Learn was felt to have cut a good deal. Going by then available public information (financials till September 2015), Tree House was perceived to be in a better position. So much so that a domestic brokerage firm even suspended coverage on Tree House citing a raw deal for minority shareholders. What changed in the last four months? Plenty, it seems.

First is the depletion of cash. At the end of September 2015, Tree House had cash and cash equivalents of about 151 crore. That dropped by 129 crore to 22 crore by March this year. During the period, borrowings (long- and short-term combined) have seen a reduction of up to 79 crore. But this does not fully make up for the reduction in cash. The company has been expanding. But the investment could have been supported by operating profits, which were decent till the December quarter end.

The second is deceleration in growth rates. Revenue growth fell from 28% in Q1 to 15% in Q2 to 5% in Q3 to a 46% drop in the last quarter. Revenues in the last two quarters were impacted by weak enrolments and reduction in fee. Profitability too was hit due to rise in expansion-led costs in the National Capital Region.

Third, the receivables and write-offs. In December 2015, Tree House claimed it managed to halve the receivables from September to 27 crore. But the March quarter results showed a reversal in trend as receivables stood at 57 crore. As the company changed its bad debt policy, it wrote off a significant amount last quarter.

These adverse trends may have forced Zee Learn to reconsider its merger decision. But what is perplexing is the dramatic turn of fortunes at Tree House. For long, Tree House investors believed that the earnings from operating schools will be sufficient to fund capital expenditure, making it a self-sustainable model. As it exited physical school buildings, the firm was expected to become debt-free. But it was not able to achieve either of these objectives, despite opening of new centres and geographical expansion. And now it is facing the ignominy of a prospective suitor backing out.