Merger with Sony can give Zee more muscle, bargaining power

Mumbai: The proposed merger with Sony Pictures Networks (SPN) addresses key structural challenges in Zee Entertainment Enterprises’ (ZEE) business such as shrinking market share and competition from streaming platforms. In recent years, they have been a bigger concern for analysts than just the issues surrounding corporate governance. On Wednesday, Zee’s stock surged nearly 32% on the BSE taking the total gain in a month to 98%.

Zee’s viewership in primetime slots has fallen over the past two years. In the general entertainment channel segment, Star and Colors have gained prominence. Besides, Zee has been unable to attract incremental viewership despite launching a few new shows. Sony, on the other hand, revamped Zee’s sports channel after acquiring it in 2018. Today, sports offerings are the most valuable asset of Sony.

Under the proposed deal, Zee shareholders will hold about 47.1% and the rest will be owned by Sony Pictures. The merged entity will be the largest in the country’s entertainment TV segment with a nearly 30% share of the total viewership. It will provide a mix of Zee’s widely-watched film library and regional content and Sony’s sports and non-fiction content. This will give the new entity more bargaining power with advertisers and content generators.

The merged company will have cash of close to Rs 12,000 crore. Analysts expect that a major chunk of these funds will be used to create streaming platform content to stay relevant amid fast-changing customer viewing habits.

Analysts believe that the merger also addresses corporate governance issues. Ashwin Patil, senior research analyst at LKP Securities said, “Sony and institutional investors will play a key role in the new entity’s management and board. Punit Goenka will continue to do what he is good at: operations.”

“If the merger happens, some investors may have concerns about Mr Goenka continuing as MD, but the board will be dominated by Sony, which would address this concern,” said Edelweiss Securities in a report retaining buy rating on Zee with a target price of Rs 428.

At Wednesday’s closing price of Rs 337.1 on the BSE, the stock was traded at 19.8 times FY23 expected earnings. While this is lower compared with the five-year average valuation of 26.9, some analysts advise booking profit at the current level.

“The rerating has been done and all the positives have been discounted going by the way it has moved up. There’s euphoria in the stock and those who have bought it should book out partially at these levels,” said Ambareesh Baliga, an independent market expert.