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Zee-Sony merger : Unleash the titans

Authored by Karan Taurani, Senior Vice President, Elara Capital

Zee Entertainment Enterprises (ZEEL) has announced its merger with Sony Pictures India (SPNI). The merged company’s 51% share will likely be held by SPNI, whereas ZEEL promoters’ stake may be identical at 3.99%. The merger may drive scale in broadcasting and astute content execution may yield lead over Star Disney, the leader – Buy.

Cash infusion of USD 1.5bn to prop investments

As per the arrangement, Sony will infuse USD 1.5bn cash into the merged entity, which will aid investments in:

1) Inorganic initiatives

2) Digital content

3) Sports content initiatives.

The final decision on investment funneling will be decided by the merged company’s Board.

Merged entity benign for investors, but path long-drawn

As indicated by the management, the completion of this merger may take anywhere between eight to10 months. In the interim, both the standalone companies will function as per their existing strategies. The merger will require approvals from the Competition Commission of India (CCI), National Company Law Tribunal (NCLT), shareholders, the stock exchange and the Ministry of Information and Broadcasting (MIB). ZEEL, as an entity, will also be delisted for three weeks once the above approvals are in place. A new Board of nine members will be formed for the merged entity, with SPNI having more control over nominating the members. This will aid investor confidence, a challenge in the past.

Revenue synergies to outweigh costs

ZEEL expects ~6-8% ensuing synergy for the merged entity, of which revenue synergy will be a key near-term driver. Some cost synergies too may ensue in the medium term. Given the merged entity’s sheer size, ad yield hike is more likely than not (~22% ad revenue market share).

Sports content initiatives – Boost for the digital medium

Sports content initiatives will be an important part of the combined entity’s digital strategy, so as to drive revenue growth/consumption. Bids for large cricket properties – such as IPL – are plausible, if found feasible. However, all investments shall be evaluated via the profit visibility lens and any aggressive investment into sports should be backed by profitability rationale.

Valuations: Maintain Buy; TP INR 450

We continue to believe that the merged entity will drive scale in the broadcasting business. And good execution in content/strategy may help it surpass the market leader, Star Disney (refer our report dated 21 December, 2021). But digital initiatives are the key monitorable to any upgrades. Despite both OTTs, Zee5 and SonyLiv amalgamating, they will significantly lag India’s largest homegrown OTT, Disney+, on revenues.

We believe 1) aggregators and 2) sports content attract most eyeballs, which snowballs to advertising. The merged OTT app will wield pricing power (SVOD) only if content initiatives find the apt fit (large-scale franchise shows).

DISCLAIMER: The views expressed are solely of the author and Adgully.com does not necessarily subscribe to it.

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