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:
- Favourable cost synergies in the TV business, which may prop profitability and
- 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:
- low FY22 base (slight Covid impact)and
- 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.