NCLT approval sets Zee's valuation to soar with Zee-Sony merger: Elara Capital

The National Company Law Tribunal's (NCLT) recent approval for the Zee Entertainment-Sony merger signals a brighter future for Zee as the merger has the potential to rejuvenate Zee's valuation, which has been lacklustre over the last two years, according to a report by Elara Capital.

The approval paves the way for the merged entity, positioning the company to regain lost ground. While challenges, like ongoing SEBI and SAT cases against the promoter, persist, the merger remains unaffected, the report said.

Recently, NCLT allowed the merger of Zee Entertainment Enterprises and Culver Max Entertainment (earlier known as Sony Pictures Networks India).

This order by the Mumbai bench, headed by H V Subba Rao and Madhu Sinha, will pave the way for the creation of a USD 10-billion media company, the biggest in the country. The tribunal also dismissed all objections regarding the merger.

Overhang gone: Zee set for a meteoric rise

NCLT approval for the Zee Entertainment-Sony merger without conditions offers further respite for Zee's valuation, which has been muted for the past two years (the stock has not given any absolute returns). The company will now move to the Registrar of Companies to file for the merged entity once the final NCLT order is released.

“In the interim, we await the outcome of the SEBI and SAT cases against the Goenka family, the promoter, which may not have any adverse impact on the merger, as Punit Goenka has already stepped down from the Board. In a worst-case scenario, the Board and shareholders will appoint a new CEO in case SAT order is against Punit Goenka. Post the regulatory approvals, Zee will be delisted and the merged company will be relisted as Sony-Zee wherein 100 shares of Zee will enable shareholders to get 85 shares of the merged entity. We do not expect any change in the deal contours despite the long delay, as NCLT has approved the scheme,” the report said. 

The report further stated that Sony will get a majority shareholding of 50.8% in the merged entity whereas the Goenka family’s stake will move up to 3.99%, which includes the non-compete fee. “We do not expect any impact from creditors filing a case against the NCLAT order,” it mentioned.

India’s OTT landscape has seen a disruption post JioCinema offering OTT content free of cost, which has led to other platforms reducing average revenue per user (ARPU) or offering content free. Unit economics are already not in favour of OTT and free content offerings will further delay the path to profitability for OTT firms.

Further, Zee also has bought TV rights to the ICC tournaments from Star Disney, which too will see lower revenue than Elara Capital’s expectations. Another big factor, which remains favourable for Zee-Sony, is the potential exit of Disney from the TV landscape. In case of a strategic partner or an exit by Disney-Star from India’s TV business, Zee-Sony may find it easier to displace the former to achieve the number one position in the TV broadcasting space.

Zee-Sony commands an ad market share of 24% as of CY22, below the other large peer, Star-Disney, which is at 33%. Formation of a large entity on the broadcasting side would lead to cost and revenue synergy, which would offset the negative impact of lower growth rates (India TV ad revenue CAGR has been flat over FY20-23).

As per the report, both OTT platforms (Zee5 and Sony Liv) coming together would help the merged company gain further market share in the digital segment too, as it has a variety of catalogues with little overlap on digital content, just as in TV.

“The OTT business is all about scale and a merged OTT platform would lead to better ARPU/ad-led revenue growth coupled with an improved distribution mechanism and revenue too. It also can lead to efficiency on cost, which, in turn, could reduce losses. The merged company also will look to enhance its offerings in the sports (cricket) segment, which is the fastest-growing genre, both on TV and digital, helped by increased consumption patterns,” as per Elara Capital report.

“We expect better execution in terms of strategic initiatives, due to global expertise and better CG (corporate governance) initiatives, which should propel higher cash flow. We do not expect Z-Sony valuation to move to 32-33x fwd. P/E (peak valuation multiple in FY18). This is because India’s media landscape has changed with TV broadcasting growth rates converging and digital business offering limited opportunity for monetisation and scale due to disruption. However, we expect the negative impact to be offset by: The merged company and an MNC-backed firm, which would lead to P/E at a 40% discount versus peak (32x one-year forward),” the report said.

“We introduce FY26E for the merged entity and value the core broadcasting business at 20x (from 17x) one-year forward P/E (potential exit of Disney from linear TV may enable Z-Sony to gain market share). We roll over to Sept-24 (since synergies will take some time to kick in) sum of the parts (SOTP)-based target pricing of Rs 340 from Rs 300 (after factoring in higher sports losses), with a cash infusion from Sony, synergy and valuing the OTT business 3x one year forward EV/sales. Our PAT estimate incorporates potential OTT losses,” it added.

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