Analyst Corner: ‘Buy’ on Zee Entertaiment with target price of Rs 428

Continuation of Punit Goenka as the MD for five years lends continuity to focus on ‘low cost and sustainable content’.

zee entertainment
Maintain ‘BUY’ on ZEEL with a TP of Rs 428 as board-related concerns are likely to get addressed one way or other.

By Edelweiss

Multiple positives at play ZEEL’s merger with Sony — subject to approval by the regulator and shareholders — addresses most of the concerns of its stakeholders. Continuation of Punit Goenka as the MD for five years lends continuity to focus on ‘low cost and sustainable content’. This comes at a time of another positive for the entire sector: TRAI has sought suggestions to improve the ease of doing business for broadcasters for a consultation paper by 5 January 2022, ad revenue data shows good trajectory. We expect merger to happen sooner than later. Maintain ‘BUY’ on ZEEL with a TP of Rs 428 as board-related concerns are likely to get addressed one way or other.

Our key thoughts on likely merger:

  1. The main promoter will be Sony, and the board will be stronger in terms of corporate governance and performance. 2. Promoters of Sony India will have the right to appoint a majority of directors on the board of the merged company. 3. Shareholders of SPNI will also infuse growth capital as part of the merger such that SPNI has approximately $1.575bn in pursuing other growth opportunities. It will be well funded to invest in OTTs and movies. 4. Risk of selling to a predatory player such as Jio goes away. 5. Sony is a strong TV broadcaster, especially in comedy and thriller genres. 6. Mr. Punit Goenka has been a good business manager for past many years. 7. The company would have eventually anyways needed a strategic investor, and a media company fits the bill better. 8. Overall, structurally a good deal. Sony has a 9% market share, ZEEL has 18%; so the combined entity will be largest in India at 27% versus Star at 24%. In addition, it should unleash huge synergies in content and OTT. The merged OTT would have a viewership share of 13–15%. At the same time, watch out for how the overlap in TV channels and OTT is resolved.
  2. Outlook and valuation: Improving; maintain ‘BUY’ We would expect most institutional investors to back this deal. We had earlier mentioned that promoters will fight out the merger. If the merger goes through, some investors may have concerns on Goenka continuing as MD, but the 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 genres. Also, at some stage, minority investors would have had to look for a strategic investor, which gets addressed upfront with this potential suitor.
  3. The ZEE stock has more than doubled in the past six months.Still, we retain ‘BUY/SO’ with a TP of Rs 428 (most aggressive on Street) as corporate governance concerns get addressed. Key risk is a serious wave 3 of Covid and the deal not going through.

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