Will the Zee Sony merger be a win-win deal?

As per relative valuations of Zee Entertainment and Sony Pictures, Zee should have a stake of around 61.25% in the combined entity. However, Sony will bankroll the future expansion and growth plans and give an assurance of cash for the combined entity. Sony Pictures has given explicit assurance that the merged entity will have a cash stash of at least $1.5-1.6 billion on an average or Rs.11,000-12,000 crore.

Sep 23, 2021 04:09 IST India Infoline News Service

About 7 trading sessions back, Zee Entertainment was languishing at Rs187 for over a year. Things changed on 13th September after two large shareholders of Zee Entertainment viz. INVESCO Fund and OFI Global China objected to Punit Goenka continuing as the managing director and CEO. Punit Goenka, the son of Subhash Chandra, represented the erstwhile promoters of Zee. The institutions felt that for its 3.44% stake in Zee, Subhash Chandra family was enjoying inordinate clout in the affairs of Zee.

What moved the stock so rapidly?

The continuance of the former promoter family in the board had already raised corporate governance issues. In the past, Zee had been embroiled in a rather unfortunate case of pledging promoter shares to mutual funds for raising funds on behalf of group companies. At that point of time, shareholders of Zee had faced huge price damage.

Things moved quite rapidly on 13-Sep. The board announced that two of its directors, Ashok Kurien and Manish Chokhani had already resigned. Meanwhile, INVESCO and OFI Global insisted that Punit Goenka and two other directors should also resign from the board of Zee. By the close of trading on 13-Sep, Zee Entertainment had gained close to 40%.

While not much moved on the Punit Goenka front, there were more surprises in the current week. Zee announced a merger with Sony Pictures late on 20th September and by the close of trading on 22nd September, the stock had scaled Rs336. That is an appreciation of 80% in just 8 trading sessions. However, the merger deal also confirmed the reappointment of Punit Goenka as CEO of the merged entity for 5 years. What is special about the merger?

Structure of the merger and what next steps

As per relative valuations of Zee Entertainment and Sony Pictures, Zee should have a stake of around 61.25% in the combined entity. However, Sony will bankroll the future expansion and growth plans and give an assurance of cash for the combined entity. Sony Pictures has given explicit assurance that the merged entity will have a cash stash of at least $1.5-1.6 billion on an average or Rs.11,000-12,000 crore.

Since Sony Pictures has six-times more cash than Zee Entertainment on its books, it will get a bigger stake than Zee. As per the term sheet signed between Zee and Sony, Sony Pictures will get 52.93% share in the merged entity while Zee Entertainment gets 47.07%. All shareholders of Zee will get shares of the merged entity in that proportion.

The Subhash Chandra family holds 3.44% in Zee Entertainment which will get diluted to 2% post-merger. Sony has agreed to compensate the former promoters with additional 2% equity for signing the non-compete agreement to not venture into media business for a fixed period. This will be paid from the Sony stake. Effectively, Sony will hold 50.93% in the merged entity while Zee owners will hold 49.07%. Subhash Chandra family will hold 4%.

The merger ratios are worked out and term sheets have been exchanged. In the coming weeks, both boards have to approve the deal. Zee will also need the approval of minority shareholders via EGM. Since they will combine linear networks, digital assets, operations and program libraries, both entities will get 90 days to conduct due diligence at data rooms. The deal will require the approval of SEBI, stock exchanges, I&B Ministry and the CCI.

Will the merger be value accretive?

Here are the quick numbers of the two entities and the merged entity.

Financial Parameters Zee Entertainment Sony Pictures Combined Entity
Annual Revenues Rs.7,730 crore Rs.5,846 crore Rs.15,000 crore
Net Profits Rs.793 crore Rs.976 crore Rs.2,000 crore
Cash on Books Rs.1,800 crore Rs.11,000 crore Rs.12,000 crore
Data Source: Company Filings

Zee scores on top line but Sony Pictures scores on net profits and cash stash. However, the merger is likely to be value accretive.
  • The merger will combine Sony’s strong franchise in sports and general entertainment with Zee’s strong presence in regional genre. Both have strong movie catalogues that can be leveraged for OTT offerings.
  • The combined OTT offering can be a homegrown counterweight to Disney Hotstar with the bouquet of sports, GEC and regional content. It gives a better bargaining chip with distributors and for now the continuance of Punit Goenka gives stability in strategy.
  • Post the merger, the corporate governance overhang should recede. That will ensure gradual re-rating of the entity from the perspective of credit rating agencies and stock markets. The higher revenue and reach should also be credit positive.
The “short term deep trade” may be over in the Zee stock after the huge rally. Even if the combined entity is valued at Rs60,000cr to begin with, Zee shareholders gain nothing as they will only get 47% share in the merged entity and Zee market cap is Rs30,500cr. However, Sony is estimated to grow PAT at 10% CAGR till FY24 while ZEE will grow at 20% CAGR. Assuming conservative valuation multiples of 20-22X earnings, investors can look for 75-80% upsides in the next 2-3 years. The long term trade is still intact.

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