Shares of ZEE Entertainment Enterprises Ltd could see significant downside in case the proposed ZEE-Sony merger is called off, said Emkay Global. As per a report, Sony is likely to issue a termination notice by January 20 as the decision on who would be at the helm of the merged company is the contentious issue, according to the report.
“After receiving all necessary regulatory approvals, this breakdown can be a setback to both Sony and ZEE, having both reported subpar growth over the last year. We believe the merger not going through will be a lose-lose for both parties, particularly in the face of competition with a much larger entity of Reliance-Disney (if the merger goes through),” Emkay Global said.
ZEE Entertainment shares traded at a valuation of 17 times its one-year forward EV/Ebitda over the last 10 years. The stock has de-rated over the last couple of years but can see significant further de-rating if the merger does not consummate, Emkay Global said.
The domestic brokerage said both ZEE and Sony will potentially have to recalibrate their strategies from ground zero, which would be a tall order. A clarity should emerge in the next couple of weeks regarding a final decision concerning the merger, and if the deal does not go through, Emkay Global sees significant downside from current levels.
“The potentially merged Sony-Zee entity would have been a formidable competitor to the Reliance-Disney association, given that it has fared better than the latter on most parameters. However, the standalone entities can be vulnerable to competition from the significantly larger entity (if the Reliance-Disney merger gets consummated). ZEE’s advertising revenue growth has been sluggish (down 8 per cent in FY23, down 3.5 per cent in H1FY24), despite FMCG companies ramping up their spending,” Emkay Global said.
This, the brokerage, attributed to the shrinking share of television advertising vis-à-vis digital and sports advertising gaining at the cost of GECs.
The standalone entities also risk the foregoing synergies. Emkay Global had estimated 4 per cent revenue synergies (of the total revenue) accruing from better bargaining power with content producers, distributors, and advertisers along with some cost rationalisation.
To plug the gap on the sports side, ZEE signed an agreement with Disney Star in August 2022 to purchase television broadcasting rights of the ICC Men’s Cricket and U-19 events for four years (2024-27).
“As per our calculations, ZEE would have to pay Rs 11,000-12,000 crore over the tenure of this deal. However, with the merger possibly not going through, we believe this deal will be in jeopardy as such a large payment will not be justified on a standalone basis. Zee5 has also seen its losses widen due to upfront fixed costs and has been unable to reverse its losses yet,” Emkay Global said.
Emkay said with a focus on profitability, growth can potentially suffer. “SonyLiv on its part has managed to scale its SVOD base better (33.3mn as per latest estimates in May-23). However, it has been unable to achieve leadership on the linear TV side. In our view, the failure of the merger could force both companies to have a complete relook at their strategies, potentially squandering a time of more than two years,” it said.
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