ZEE-Sony merger a win-win for both entities: Karan Taurani

The ZEE-Sony merger will be a win-win proposition for both entities,according to Karan Taurani, Senior Vice President, Elara Capital."In a deconstruct of Zee Entertainment Enterprises(ZEEL)-Sony merger, based on Sony Picture Network India’s FY21 financials andits OTT offering, Sony Liv’s, prospects, we herein present key observations onfinancial implications.

Our best-case implications for ZEEL assume:

  1. Favourable 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-monthnotice," Karan opined.

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 widecontent variety across genres.

On subscription revenues, we believe, thenegative impact of NTO 2.0 will be relatively subdued for ZEEL-Sony as anentity as they can efficiently bundle their best channels, thus enjoying anedge 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 consolidatedentity to prop margin, he said: "ZEEL-Sony together may enjoy multipleadvantages on the cost front. Both the entities commanded 23-26% EBITDA margin,as on FY21. However, we expect the margin to improve 230bps in the next twoyears to 26% in FY24E, led by cost synergies in manpower and SGA expenses.ZEEL-Sony’s margin for core broadcasting (TV) would remain healthy within32-33%, as the likelihood of huge cost inflation for TV content seems lowunless a channel launch is planned."

Adding more on the ZEEL-Sony merger, Karan said: "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 byadvantages of scale (second largest player in the TV industry), which seemsstable 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 businessat INR 91bn (on FY24E EV/sales of 6.5x). Potential exists for this multiple toexpand if a big shift to SVOD base revenues materializes as such revenues arestickier in nature and can have a significant positive impact on cash flows,which in turn may positively impact content investments. Concerns for thedigital segment – content costs may spike as large giants such as Netflix trimprices to fuel aggressive India expansion – also exist. We maintain Buy on ZEELand value ZEEL-Sony’s consolidated entity at INR 905bn. This translates into araised TP of INR 450 (based on 47% stake of the currently listed entity, ZEEL)from INR 410 earlier," added Karan.


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