Zee Entertainment Rises On CCI Nod For Merger With Sony; Analysts' Take
Competition Commission of India has approved the Zee-Sony merger, subject to "certain modifications".
Shares of Zee Entertainment Enterprises Ltd. gained after India's competition regulator gave its conditional approval to the proposed merger of Zee Entertainment Enterprises Ltd. and Sony Group's Indian unit.
The Competition Commission of India said the approval has been given subject to "certain modifications".
The regulator has approved the proposed combination subject to the parties carrying out modifications. According to Zee Entertainment’s disclosures and BQ Prime's calculations, Sony will initially get a 52.93% stake in the merged company.
Shares of the company gained as much as 7% intraday, before closing 4.3% higher on Tuesday. It extended gains from Tuesday when it rose 7.6% intraday.
Of the 23 analysts tracking the company, 20 maintain 'buy', one suggests 'hold' and two recommend 'sell', according to Bloomberg data. The return potential of the stock is 7.8%.
CLSA
Has a 'buy' recommendation with a target price of Rs 316 on Zee.
Remains positive on the Zee-Sony merger ahead. Merger will be a stock rerating catalyst.
While the detailed CCI order is awaited, the modifications are likely as submitted voluntarily by the two parties. The CCI approval is a significant positive.
Zee and Sony when merged will combine linear networks, digital assets, production operations and program libraries.
Valuation as compelling, currently trading at a 15x PE for FY24.
The Zee meeting to seek shareholder approval for the proposed merger is scheduled for Oct. 14.
Edelweiss
Has a 'buy' rating on Zee.
Stock could give 30-40 % upside over next 7-12 months as by that time Merger will be done, corporate governance issues will be resolved as merged entity will be a Sony dominated board and ad revenues will be back.
There is unlikely to be any major issues due to conditional approval by CCI as we had highlighted. Minor adjustments likely in tail of channels in few genres. Unlike a cement merger, where assets need to be sold, in media, content is what is important rather than channels.
Although Q2FY23 results for Zee will be weak (not a surprise given margin pressure for consumer companies and rural slowdown in Q2 remains on higher side), Edelweiss expects Zee to do well from 7-12 month time frame.
Voting of shareholders on Oct. 14, where it doesn’t see any major issue, (including from larger holders).
So second half of the fiscal year is likely to be much better for Zee than first half in terms of ad revenues.
There are close to 90 channels, so a few channels divestment in each genre like say in Hindi Movies, rural Hindi GEC, Bangla etc. in merged entity won't make much of an impact. Sees divestment of only 3-4 channels (small channels) out of 90.
CCI will give time for any divestment, NCLT process also going on well
Media speculation on divestment of big/flagship GECs in Hindi GEC, Hindi movies, Marathi is highly unlikely.
Need to see final CCI order which takes time of few weeks.
Motilal Oswal
Has a 'buy' rating on Zee with a target price of Rs 310, implying a potential upside of 16%.
Merger process has taken longer than the management expectation of 9-10 months, but once the shareholder approval is in place, the merger process should be largely procedural and may conclude by Q4.
Zee Sony merger could change the business trajectory. Their OTT apps, while performing modestly individually, have double digit revenue/subscriber market share on a combined basis. The combined operating cost of Rs 3,000 crore is similar to that of the top OTT apps.
Assuming the combined entity spends two-thirds (Rs 2,000 crore) on content, it could match the top entertainment apps in the original content generation space.
Individually, Zee lacked the strength to compete with the top OTT apps; the combined entity has the potential to create a strong foothold and content slate.
The stock, on a combined basis holds an EV of Rs 30,640 crore, and trades at merely 7x EV/Ebitda for the normalized linear business, assuming zero value for the OTT business. The concerns on merger going through have been playing on the stock price, as is evident from its low valuation. But now, the merger process closer to completion, the stock should benefit.
See potential for value accretion on both the linear and OTT businesses, given the high ROCE and growing linear business and strong wherewithal in the OTT business.
With the change in the board and the majority stake now being owned by Sony, an MNC, the stock should also benefit from better capital allocation, improved corporate governance, and business synergies.