Zee Entertainment's shares plunged on Tuesday a day after Japanese media giant Sony called off the proposed merger of its Indian broadcasting business with the Essel Group firm.
Broadcasting in India is a highly competitive space, what with global players like Sony, local conglomerates like Reliance and regional giants like Sun TV eyeing a larger share of the pie. So, in December 2021, when Culver Max Entertainment (Sony Pictures Network India) and Zee Entertainment agreed to merge their operations to create a mega company with a bouquet of 76 TV channels, two streaming platforms, and a market share of over 25 per cent, it received a huge thumbs up from investors.
However, amid various differences, including over who would lead the merged company, and the regulatory challenges Zee's promoter Subhash Chandra and his son Punit Goenka, the MD and CEO of Zee Entertainment found themselves in (both were barred by SEBI from holding any managerial position in Zee for alleged siphoning of funds, which was later set aside by SAT), Sony terminated the proposed merger on Monday. The company said "closing conditions to the merger were not satisfied by the end date."
It has also sought a termination fee of $90 million from Zee alleging breach of terms of the merger cooperation agreement (MCA). Zee refuted the claims of Sony and said it would take all necessary actions, including legal, and contest Culver Max's claims in arbitration proceedings. It said that Goenka was even agreeable to step down (as per the merger agreement, Punit Goenka was to take over as the CEO of the merged entity) in the interest of the merger and proposals in this regard were discussed.
Nevertheless, with the merger now terminated, investors dumped Zee Entertainment shares and several brokerages downgraded the stock and slashed the target price. Zee shares were trading down 31.7 per cent in afternoon trade on Tuesday at Rs 158.40. Just last month, the stock had a hit a 52-week high of Rs 299.50 on December 12.
CLSA downgraded Zee Entertainment to "sell" from "buy" and slashed its target price on the stock by 34 per cent to Rs 198 from Rs 300.
"We believe Zee's valuation is likely de-rate back to 12 times price to equity (PE)," said CLSA's Deepti Chaturvedi.
Chaturvedi pointed to the challenge of low promoter ownership that Zee faces. Back in 2019, Zee promoters had to repay loans with multiple stake sales to investors driving down their shareholding over time to 4 per cent from 42 per cent. The merger between Sony and Zee would have addressed this challenge as Sony would have held 51 per cent in the company post merger, she pointed.
Himanshu Shah, vice-president at Dolat Capital, said the deal termination was negative for all stakeholders.
"In backdrop of changed media landscape post digitization, strong competitors and their likely consolidation (Viacom-Disney), Zee-Sony merger with complementary strength was a welcome for all the stakeholders," said Shah.
He further added that in the backdrop of Zee's poor governance, earnings and cash flows, merger was inevitable, but with that off the table now, valuations would materially de-rate. Dolat too downgraded Zee Entertainment to "sell" cutting the target price to Rs 195 from Rs 320.
Emkay Global Financial Services too downgraded the stock to "sell" from "buy" and slashed the target price to Rs 175 from Rs 315.
What next for Zee Entertainment and Sony?
Zee Entertainment has faced operational challenges over the past couple of years with advertising as well as subscription revenue getting impacted, pointed Emkay's Pulkit Chawla. In the year ended March 2023, Zee Entertainment's total income declined 1.6 per cent year-on-year to Rs 8,168 crore. Net profit for the year also fell sharply to Rs 48 crore from Rs 965 crore. Losses at Zee's OTT platform Zee5 have also widened in recent years.
In 2022, Zee and Disney had struck a deal, as per which, Zee would broadcast ICC (International Cricket Council) Men's under-19 tournaments in India over 2024-2027. Zee would have to make a huge capital commitment (Chawla estimates around Rs 11,000-12,000 crore) for the deal, which will be hard to justify now that the merger with Sony is off.
Sony's termination of the deal with Zee comes at a time Reliance and Disney have been talks to merger their Indian media operations.
"The failure of the deal with Sony and the potential Reliance-Disney merger can further weaken Zee's position, leaving it at a vulnerable spot in the overall industry," said Chawla of Emkay.
While, Sony has a huge media business globally, it hasn't been able to scale up significantly in India.
"Sony would potentially look for other options in the market as well, having itself been unable to garner significant market share, with industry consolidation being highly likely going ahead," said Chawla.
All eyes on institutional investors
Currently, 96 per cent of Zee Entertainment shares are held by public investors, of which 32.49 per cent is held by mutual funds, foreign portfolio investors hold 27.22 per cent and insurance companies hold 10.66 per cent.
These institutional investors, especially mutual funds, backed Zee's management thus far, particularly in the backdrop of the deal with Sony. But with the deal terminated and Zee's shares in a tailspin, there is bound to be unease.
There have already been reports that some institutional investors had written to SEBI a few days ago over the stalemate between Zee and Sony. There was also a speculation that institutional investors could present an alternative deal for the merger. All eyes will now be on these investors and the route they take from here.
In 2021, Zee and US-based Invesco, which was an investor in the company, were in tussle, with Invesco at one point even calling for an EGM for Goenka's ouster. Eventually, the EGM demand was dropped and the fund even backed the deal with Sony. Invesco, which at one point had held around 17.88 per cent in Zee, has since sold its stake and exited the company.
"We believe there is likelihood of quick action by the non-promoters viz. change in management/board and/ or alternate options for merger," said Shah of Dolat.
The investors may call an extraordinary general meeting (EGM) if they decide to take matters in their own hands and oust the current management and then look for potential suitors, according to industry watchers.
Zee will attract other suitors for potential deals, with "going it alone" being a "low probablity event", said Emkay's Chawla.
