Media & Entertainment Sector -Sony-ZEEL merger – Best-case implications

The ZEE-Sony merger will be a win-win proposition for both the entities, according to Karan, "In a deconstruct of Zee Entertainment Enterprises (ZEEL)-Sony merger, based on Sony Picture Network India’s FY21 financials and its OTT offering, Sony Liv’s, prospects, we herein present key observations on financial implications. Our best-case implications for ZEEL assume: 1) favorable cost synergies in the TV business, which may prop profitability and 2) good content execution in the digital offering given the wide content variety. ZEEL’s NDA with Sony will expire on 21 December 2021, given the three-month notice."

On the merger versus industry average he said, "Sony-ZEEL together command ~22% of the ad revenue market. We estimate FY22E-24E ad revenue CAGR of 13%, on: 1) low FY22 base (slight Covid impact) and 2) growth a tad above industry average, on TV synergies – Both offer a wide content variety across genres. On subscription revenues, we believe, the negative impact of NTO 2.0 will be relatively subdued for ZEEL-Sony as an entity as they can efficiently bundle their best channels, thus enjoying an edge over the competition. Also, Star and ZEEL-Sony may become irreplaceable given their sheer sizes (~45% ad market share) and may gain market share, medium-to-long term."
Adding on traditional business and their synergies for the consolidated entity to prop margin, he said, "ZEEL-Sony together may enjoy multiple advantages on the cost front. Both the entities commanded 23-26% EBITDA margin, as on FY21. However, we expect margin to improve 230bps in the next two years to 26% in FY24E, led by cost synergies in manpower and SGA expenses. ZEEL-Sony’s margin for core broadcasting (TV) would remain healthy within 32-33%, as the likelihood of huge cost inflation for TV content seems low, unless a channel launch is planned."
Adding more on ZEEL & Sony a win-win proposition, " We believe, if the merger materializes, it will be a win-win proposition for both the entities. In our view, ZEEL-Sony’s broadcasting business will command a premium multiple of 20x one-year forward P/E, led by advantages of scale (second largest player in the TV industry), which seems stable despite the big digital threat.

We value ZEEL-Sony’s TV business (excluding digital revenues/losses) at INR 814bn. Also, we value the consolidated digital business at INR 91bn (on FY24E EV/sales of 6.5x). Potential exists for this multiple to expand if a big shift to SVOD base revenues materializes as such revenues are stickier in nature and can have a significant positive impact on cash flows, which in turn may positively impact content investments. Concerns for the digital segment – content costs may spike as large giants such as Netflix trim prices to fuel aggressive India expansion – also exist."
"We maintain Buy on ZEEL and value ZEEL-Sony’s consolidated entity at INR 905bn. This translates into a raised TP of INR 450 (based on 47% stake of the currently listed entity, ZEEL) from INR 410 earlier."