Zee-Sony merger termination to have negative impact on both, potential threat from RIL-Disney merger: Karan Taurani

The termination of the merger deal between Sony Group Corp. and Zee Entertainment Enterprises (ZEEL) might bring some challenges for both companies as they might face a potential threat from the merger of Reliance Industries (RIL) and Disney over the near term,  Karan Taurani, SVP- Research Analyst (Media, Consumer Discretionary and Internet), Elara Capital, said.

Culver Max Entertainment (CME) today issued notice to ZEEL, terminating the agreement dated December 22, 2021, to merge ZEEL and CME, Sony Pictures Entertainment said.

Following this development, Taurani said, “We believe this will have a negative impact on both parties, as both companies are going through stiff competition from digital media and face a potential threat from the merger of Reliance Industries (RIL)/Disney over the near term.”

Furthermore, he mentioned that Zee has reported a muted performance in terms of growth and profitability over the last two years, as revenue growth has converged to 2.2% (FY20-24 ending) and EBITDA margin dipped to 10.2% (9 month - FY24 ending), due to losses in the OTT segment and lower growth in linear TV segment. Zee had also signed a contract with Disney for the sub franchise of sports (ICC tournaments) rights on the linear TV side.

“We had estimated annual losses of approximately Rs 15.2 billion due to the same in FY25 and beyond, due to hefty content cost, lower sports ad revenue and cricket content being available free on OTT. Zee may not fulfil its commitment on the same (has a cash balance of mere Rs 6 billion, vs a potential contractual obligation of Rs 40 billion per year) as the above was a strategic decision which could reap benefits due to the Zee-Sony merger,” Taurani said.

There could be a negative impact of a penalty/legal proceedings on the above for Zee, however PAT (profit after tax) will see a positive impact due to absence of sports losses in FY25 and beyond, he added.

“We believe Zee will see a sharp de-rating of PE valuation multiples towards at least 10x one year forward or lower, due to the merger potentially being called off, as linear TV growth has converged sharply,  Zee may not have any potential to scale up OTT offering in a highly fragmented market, lower profitability - EBITDA margin ex-sports losses could converge towards 14% and any further write offs on the inventory side or matters pertaining to related parties creditors or not honouring the sports contract with Disney (ICC tournaments - Zee could have potentially paid half of the $3 billion value for TV rights),” Taurani said.

Furthermore, he added that however, over the near term, he foresees valuations to be under pressure, as merger with Sony was the key driver for valuations to move up over the last two years

“With the merger being called off - the target price for Zee could be in the range of Rs 130 (including sports losses) and Rs 170 (ex-sports losses - assuming Zee does not fulfil sports rights commitment with Disney). Further, this move will also lead to multiple legal hurdles like battle with Sony over the non compete fee, legal proceedings if Zee does not fulfil contract with Disney (sports contract) and ongoing legal proceedings by various creditors of the Essel group (Axis Finance, IDBI Bank etc),” Taurani added.

The termination comes after a deadlock between the firms regarding the leadership of the combined entity. Sony had reportedly objected to the condition in the term sheet to appoint Zee CEO Punit Goenka as CEO of the merged company amid an investigation into his conduct by India’s capital markets regulator.

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