Zee-Sony merger: CLSA downgrades Zee Entertainment to ‘sell’, slashes target price by 34%

Global brokerage firm CLSA has revised its recommendation on Zee Entertainment, changing it from a previous ‘buy’ rating to a ‘sell.’ This update comes in response to the cancellation of the $10 billion mega-merger with Sony Pictures Network.

“With Zee-Sony merger being terminated, we believe Zee’s PE will slump back to 12x levels, seen prior to the Sony merger announcement in August 2021,” the brokerage firm stated.

Also read: Mint Explainer: The collapse of Sony-Zee merger and its wider implications

The global brokerage firm has further slashed the target price of Zee Entertainment stock by 34% to ₹198.

Sony has formally asked Zee to halt the merger, while simultaneously seeking a termination fee of $90 million, alleging breaches on the part of the Indian media giant. Sony has escalated the matter by initiating arbitration proceedings against Zee.

Contrarily, Zee is challenging Sony’s assertions of breach, contending that its CEO, Punit Goenka, was even prepared to step down in the spirit of facilitating the merger.

The cancellation of the highly anticipated merger has reignited concerns about Zee’s corporate governance, especially in light of the unprecedented promoter share pledging crisis in 2019. During that crisis, the company’s promoters, the Essel Group, repaid loans through multiple stake sales to investors.

Also read: Sony demands $90 mn from Zee after terminating deal

Meanwhile, CLSA highlighted the considerable competitive challenges anticipated for Zee, serving as an additional deterrent for the stock. The firm foresees heightened competition in the media sector, particularly with the reported merger of Reliance and Disney Star.

The brokerage firm also sees a decline in the valuation of the company. “ With the merger terminated, Zee’s valuation will likely decline to 12x PE levels (Aug 21) seen prior to the merger announcement.”

CLSA analysts posit that the Zee-Sony merger could have effectively tackled Zee’s issue of low promoter ownership. Following the merger, Sony would have possessed a controlling 51 percent stake in the combined entity.