Zee Entertainment: Challenges aplenty as Sony calls off merger

23 Jan 2024 , 01:12 PM

Recommendation: Sell; Target price: Rs 149

 

Analysts of IIFL Capital Services downgrade Zee from BUY to SELL. With Sony calling off the merger with Zee, the expectations of a re-rating led by an improvement in capital allocation have been belied, and potential derating looms. Given that RIL and Disney-Star have reportedly signed a non-binding agreement to explore merger of their media operations, Zee could face a formidable rival if the deal consummates. With the company’s core business growing in single digits and Q3FY24 Ebitda likely to be >50% down from Q3FY22 Ebitda (when Zee-Sony merger was announced) due to ZEE5 investments, the company faces an uphill task. The fate of the ~Rs120bn ICC TV rights deal for 2024-27 also hangs in balance. Analysts of IIFL Capital Services new TP comes to Rs149, based on 8x target PE for the TV business and 2.5x revenue multiple for ZEE5. Any precipitous fall in Zee stock could attract potential acquirers. 

Sony has called off the Zee deal: 

Sony has terminated the definitive agreement for merger with Zee, after citing that the closing conditions were not met even after a month post the end date (21st Dec, 2023). It has also demanded US$90mn termination fee from Zee. Zee has stated evaluating options, including contesting Sony’s claims. It also mentioned that Sony terminated the agreement despite Mr. Punit Goenka being agreeable to step down as MD&CEO of the merger entity. While media reports mention a clutch of institutional investors contemplating calling an EGM to get Mr. Goenka removed, analysts of IIFL Capital Services believe this could lead to prolonged litigation (as seen in Dish TV’s case). 

Zee faces an uphill task: 

Zee-Sony merger would have created a scale entity better placed to navigate the current challenging times for the TV industry. Zee now has the uphill task of improving TV revenue growth while cutting down OTT losses meaningfully. With Star sub-licensing the TV rights of ICC events to Zee for an est. Rs120bn over 2024-27, the latter could see meaningful costs and payouts in FY25 unless it resells this to another buyer. Zee’s current absence from the sports genre is also likely to add to costs as it builds capabilities for sports broadcasting. 

Analysts of IIFL Capital Services expect the stock to de-rate meaningfully: 

Merger with Sony would have resulted in significant synergy benefits. It would have created an entity 50%+ owned by Sony, leading to re-rating on improved capital allocation expectations and MNC parentage. Analysts of IIFL Capital Services expect the Zee stock to de-rate from the current 28x 1YF PE.