Merger with Sony to fill gaps in ZEEL’s portfolio; near-term volatility is expected; TP up to Rs 428; ‘Buy’ maintained
Zee Entertainment (ZEEL) and Sony Pictures Networks India (SPNI) have announced an exclusive, non-binding term sheet to merge both the companies. The combined entity will be a publicly listed entity and the nation’s No.1 TV broadcast company. Punit Goenka will continue to be MD of the merged entity for 5 years. If approved by regulators and investors, this potentially addresses most of the key concerns. Promoter of the combined entity will be Sony.
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We will continue to track developments in the board room. Maintain ‘Buy’ on ZEEL with highest TP on street at Rs 428 as board-related concerns are likely to get addressed one way or other.
Our eight key thoughts on the development, if approved
(i) Sony’s FY20 broad numbers are sales of Rs 58 bn, Ebitda of Rs 13 bn. ZEE’s FY20 sales were Rs 81 bn and Ebitda, Rs 16 bn; (ii) promoter will be Sony Group Corporation, Japan; (iii) overall, structurally a good deal. Sony has 9% market share, ZEEL has 18%; so the combined entity will be largest in India at 27% versus Star at 24%. Huge synergy in content, OTT. How overlap in TV channels/ OTT is resolved is monitorable; (iv) sports (important for OTT) will also be part of this, which was missing for ZEEL; (v) Goenka continuing as MD for five years will lead to continuity, focus on low cost and sustainable content, but also higher focus on improving OTT user experience; (vi) need to wait for process of due diligence, regulatory approvals and EGM. Deal will take time; the stock will remain volatile till EGM and approvals fall in place; (vii) need to see how culture, mgmt structures of the two firms pan out; (viii) need to see how Board room evolves on this and next EGM.
Outlook: Near-term volatile
We need to see how key institutional investors react to this development. We mentioned in a recent note that this process will be volatile and promoters will give a fight. If merger happens, some investors may have concerns on 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.
We expect the stock to be volatile in the near term. Due to these reasons, we retain ‘BUY/SN’ and increase TP to Rs 428 (earlier 343). We increase our multiple from 20x to 25x as corporate governance concerns get addressed. Our TP is the most aggressive on street. Key risk to this is the deal not going through.