Zee Entertainment shares extend rally on positive brokerage view; Sony deal seen value accretive

Zee Entertainment signs merger deal with Sony Pictures Networks India

Analysts view this merger as a positive for Zee as it potentially addresses the company’s board-related concerns, improves corporate governance and operational performance which could aid in the long run significantly and brings huge synergy gains.

Sony has a nine percent market share, while Zee has 18 percent and so the combined entity will be largest in India at 27 percent versus Star at 24 percent market share.

Global brokerage firm CLSA believes that the merger terms are favourable for Zee. The merger will combine Zee and Sony linear TV networks, digital assets, production operations and content libraries. The merged company will be bigger than sector leader Star. Sony will add to Zee in entertainment genres, gaming and sports.

“With Zee’s proposed merger with Sony a positive and strong growth ahead, cash swell and stock valuation compelling at 15x FY23PE, we retain 'buy',” CLSA said.

It raised its target price to Rs 400 from Rs 306 earlier, which is an 18x PE multiple to one-year forward earnings estimate and at a 33 percent discount to the 10-year average.

Experts see revenue synergies for Zee on the merger to be at 6-10 percent with the expanded bouquet of channels post-merger and improved reach. It also sees some synergy benefit in subscription revenues.

The merger is expected to work out well also because Zee and Sony have very limited content overlap. Sony Pictures India, a wholly-owned subsidiary of Sony Corporation, Japan, has 26 channels in India including 10 in sport and three each in Hindi GEC and movies. It has a limited regional presence in Marathi and Bangla GECs.

“Sony channel portfolio has limited overlap with ZEEL with Sony Hindi GEC focused at non-fiction and is strong in the comedy genre. Besides, Sony has a large movie library, which should further strengthen the already strong Zee library. In addition, Sony has a digital presence – Sony Liv. However, we see scope for some channel rationalisation, which should help drive cost synergies for the company,” ICICI Securities said.

The brokerage has upgraded its rating on ZEEL to ADD from 'hold' and raised the target price to Rs 374 from Rs 200 earlier. It also raised the FY23E P/E multiple to 22x from 12x.

Meanwhile, an important issue to watch out for would be how key institutional investors react to this development.

“If the merger happens, some investors may have concerns on Mr. Goenka continuing as MD, but Board will be dominated by Sony, which would address this concern.  The merger fills in gaps in ZEEL’s portfolio in sports, Comedy and Crime shows. Also, at some stage, minority investors would have had to look for a strategic investor, which gets addressed upfront,” Edelweiss Securities said.

It expects the stock to be volatile in the near term. It retains 'buy' and increases the target price to Rs 428 from Rs 343 and raises multiple from 20x to 25x as corporate governance concerns get addressed.