ZEE announced completion of the due diligence and final contours of their deal. SONY and ZEE’s promoters will hold 51%/4% in the merged entity, while the rest will be held by the public. There will be a fresh capital infusion of `113 bn ($1.6 bn) by Sony, including the Rs 11 bn as non-compete fee to ZEE’s promoters, which will be utilised to increase its stake to 4% from 2% in the merged entity. The leadership of the combined entity will be driven by ZEE’s current MD and CEO Punit Goenka. The majority of the board of directors of the combined company will be nominated by Sony.
The merged entity is valued at ~17x FY20 EV/Ebitda and 22x P/E. On a SoTP basis, the merged entity’s linear business is estimated to be valued at 11-12x EV/Ebitda, with a negative value for the OTT business. The combined entity will be a leader in the broadcasting space, with a strong war chest for intensifying its OTT foray and an investment similar to that made by Netflix on its India content. The deal addresses past corporate governance and balance sheet issues.
A strategic partner like Sony will have the ability to leverage large scale opportunities in the Indian media space. We upgrade ZEE to Buy from Neutral with a revised TP of Rs 425. Roadblocks in the fruition of the deal could be key risks.What’s in it for the stakeholders?Zee: While ZEE had a healthy balance sheet and market position, the merged entity will have a better market standing (revenue and cost synergies), given its scale and ability to intensify its OTT foray.
The combined entity will have revenue of Rs 140-150 bn and Ebitda generating capability of 35% in the linear business, i.e. ~`50 bn. It will have a wider portfolio across genres, including general entertainment, movies, and sports. The company over time could use its leverage to boost its competitive position and synergies.As per our estimate, both ZEE and Sony’s current combined OTT spend would be a sizeable ~Rs 30 bn annually. This could be far better utilised as a merged entity to ensure a steady flow of movie content and other genres. Given ZEE’s history of various related party transactions and non-core investments, this deal may address most concerns.Son y: Sony gets two things: (a) A business at a reasonable price.
ZEE is currently valued at below 20x, a far cry from its peak valuation. (b) Better management leadership to drive the broadcasting business, considering ZEE’s industry leading performance over the years.Valuation and viewThe merged entity will get a strong board, along with senior management (current MD: Goenka) that has a very strong operational background. There is a possible upside from the merged entity’s higher competitive position in the market and synergy gains, given that both the companies have a significant potential to improve profitability. The stock is still trading below 20x, including SPNI. Improving corporate governance and operational performance could significantly aid in the long run.
But the deal may take 3-4 quarters to fructify, given the long haul of structural changes to the business, board, and leadership, which may take time to drive incremental earnings. At ZEE’s current m-cap, this implies a post-money enterprise value of Rs 524 bn for the merged entity, implying an EV/Ebitda of 17x on a FY20 basis and a P/E of 22x. Considering the stable state 35% Ebitda margin for the linear broadcasting business, the OTT business garners negative value. This could be in for a big change given the merged entity’s strong war chest and ability to invest in content to drive growth. We upgrade our rating to Buy with a revised target price of Rs 425/share (at 25x Sep’23e EPS).