ZEE-Sony merger: Total market cap of combined entity to be around Rs 95,000 cr: Industry

The news of the merger of Sony Pictures Networks India (SPNI) and Zee Entertainment Enterprises Ltd (ZEEL) has created ripples across the country’s M&E industry. Industry experts see this merger creating a media behemoth with deep pockets and a win-win for the broadcast as well as digital space in India.

Karan Taurani, Senior Vice-President, Elara Capital Ltd; Ashish Pherwani, Partner, Media & Entertainment, EY India; and Ravishu Shah, Managing Director & Co-Head Valuation, RBSA Advisors, decode what this merger means for the M&E industry, how SPNI and ZEEL will be individually impacted, what synergies the two media houses bring to the table and much more.

Prima facie positive impact for Zee: Karan Taurani, Senior Vice-President, Elara Capital Ltd

Less overlap; more synergies - There is a big opportunity in terms of synergies as Sony is doing well in sports, mainstream GEC, whereas ZEE has a strong recall on regional genre, which is less or absent for Sony; both have a very strong movie catalogue which can be used for OTT and TV offering.

OTT content strategy - Both companies can go to market together with their merged OTT offerings, which, too, are slightly different in content – Sony is more into sports and mainstream shows (‘Scam 1992’), whereas ZEE is into regional web series and hence, the content strategy can augur well to create a platform which have all of offerings – they may emerge the second largest homegrown OTT after Disney+ Hotstar in India.

OTT distribution strategy - Given the scale and depth of content, the combined entity will have a better bargaining power with the distributors – OEM, telcos and other platforms that, too, will be a win-win rather than them going to market separately.

Advertising synergies - ZEE has fared better that industry average on the ad growth front due to their strong execution around their advertising strategy; both entities together will have a better reach towards a larger number of advertisers.

Consolidation is a big positive - In times where growth rates in the TV industry – advertising and subscriber revenues – have converged due to shift to digital and uncertainty towards NTO 2.0, consolidation is a big respite in itself as it will lead to both players capitalising on each other’s strengths and compete with the market leader – Disney+ Hotstar.

Corporate governance overhang to fade away - With SPN having the controlling stake, the overhang on corporate Governance will fade away and this will also enable multiple re-rating for the company. In terms of management, Punit Goenka has the best capabilities to run the broadcasting business. They will need to reinvent their digital offerings over a period of time to drive further re-rating.

As per our initial estimates, Sony is estimated to grow at a lower CAGR of 10% (F20-24) on PAT (profit after tax), which translates into Rs 1,460 crore, whereas our estimate on ZEE is Rs 1,676 crore for FY24 (CAGR of 20%); the combined entity could have a PAT of around Rs 3,100 crore. We expect the PE multiples to be in the range of 16x-17x; execution on the digital business will drive further re-rating, however even on these valuations, there is a possibility of a 80-100% upside at least. If the merger goes through, ZEE’s market cap will move to around Rs 45,000 crore, while the total market cap (including Sony - combined entity) will be around Rs 95,000 crore.

We will monitor more developments in the coming months; this looks like a structural re-rating candidate in the Indian broadcasting space.”

Will create the largest media house: Ashish Pherwani, Partner, Media & Entertainment, EY India

“It is a brilliant deal, creating the largest media house! There are huge strengths across regional and Hindi content, as well as films. And together, both ZEE and Sony can figure out the best way to enter digital.”

Will provide strategic synergies & cash balance of ~$1.57 bn of SPNI: Ravishu Shah, Managing Director & Co-Head Valuation, RBSA Advisors

“The merger terms envisage non-compete arrangement between the promoters of Zee Entertainment Enterprises Ltd (ZEEL) and the promoters of Sony Pictures Networks India (SPNI), which will provide an incremental stake of ~2.1% to the ZEEL promoters in the merged company (indicative value of ~Rs 1,075+ crore). It will be interesting to see how Regulators and Institutional shareholders respond to such non-compete arrangement with the promoters of a listed company as part of the merger process. It may be pertinent to note that the SEBI Takeover Code does not permit differential treatment between the promoter and public shareholders.

Also, obtaining ZEEL shareholder approval for the proposed merger and for continuation of MD and CEO of ZEEL as the MD and CEO of the merged entity for next five years may entail challenges, considering the current stressed relationship between certain institutional shareholders of ZEEL and the ZEEL Board/ Management.

On an overall basis, the merger is expected to provide strategic synergies and the cash balance of ~$1.57 billion of SPNI will provide growth impetus to the merged entity. Also, the proposed constitution of the Board of the merged entity (majority directors to be appointed by Sony), may help allay the concerns of certain institutional shareholders.”

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