Zee-Sony merger collapse to negatively impact both Cos: Karan Taurani

The termination of the proposed merger between Zee Entertainment Enterprises Limited and Sony Pictures Networks India is anticipated to have a negative impact on both the companies, says Karan Taurani, senior analyst, Elara Capital.

According to him, both companies are currently facing stiff competition from digital media and could face additional threats from the potential merger of Reliance Industries Limited (RIL) and Disney in the near term.

The termination of the merger has raised concerns about the future trajectory of Zee’s stock performance.

As per Sony’s official communication, the merger has been terminated following the rejection of the extension proposal by Zee.

Zee’s performance and challenges: Zee has reported muted growth and profitability over the last two years, with revenue growth converging to 2.2% (FY20-24E) and EBITDA margin dipping to 10.2% (9MFY24E). Challenges include losses in the OTT segment and lower growth in the linear TV segment.

Sports rights contract with Disney: Zee’s contract with Disney for sub-franchise of sports (ICC tournaments) rights on linear TV raises concerns. Taurani estimates annual losses of approximately Rs 15.2 billion in FY25 and beyond. The termination of the Zee-Sony merger could impact Zee’s ability to fulfill its commitment.

Potential de-rating of valuation: Taurani anticipates a sharp de-rating of Zee’s PE valuation multiples, possibly towards at least 10x one year forward, or lower. Factors contributing to this include the convergence of linear TV growth, challenges in scaling up OTT offerings, lower profitability, and potential legal issues.

Shareholder dynamics and alternative scenarios: There is a possibility of top five shareholders owning approximately 30% of Zee working together to pursue a deal with Sony. However, this process is time-consuming and may involve legal hurdles. A local Indian conglomerate buying out Zee could also provide respite to valuations.

Potential penalties and legal hurdles: Sony may have to pay a penalty of $100 million for calling off the merger, according to media reports. Taurani foresees potential legal hurdles and disagreements between the two parties.

Near-term valuation pressure: The termination of the merger with Sony, which was a key driver for valuations over the last two years, is expected to result in near-term valuation pressure.

Worst-case target price for Zee: In case of the merger being called off, Taurani suggests a worst-case target price for Zee in the range of Rs 130 (including sports losses) to Rs 170 (excluding sports losses, assuming Zee does not fulfill sports rights commitment with Disney).