ZEE shares at Rs 130? Stock sees 'Sell' recommendations, PE derating on Sony merger termination
ZEE may see a sharp de-rating in P/E valuation of its broadcasting business to at least 10 times one-year forward or lower, due to the unfinished merger, as linear TV growth has converged sharply, said Elara Securties.
- Jan 23, 2024,
- Updated Jan 23, 2024 7:47 AM IST
ZEE Entertainment Enterprises Ltd valuations could take a severe hit in the near-term following the termination of merger deal by Sony India on account of alleged breaches of merger cooperation agreement (MCA) terms. A handful of brokerages revised their recommendations on the stock to 'Sell', as Sony sought $90 million in termination fees. The deal termination is a lose-lose for both the parties, analysts said as they cut their prevailing target prices on ZEE by up to 50 per cent.
ZEE's corporate governance was in focus in the past, when the stock had de-rated during the promoter share pledging crisis in 2019 and a fall in business cash conversion. The Zee-Sony merger would have addressed ZEE's low promoter ownership challenge, analysts said while anticipating shareholder activism against the ZEE management in coming days.
ZEE may see a sharp de-rating in P/E valuation of its broadcasting business to at least 10 times one-year forward or lower, due to the unfinished merger, as linear TV growth has converged sharply, said Elara Securties.
ZEE may not have any potential to scale-up OTT offering in a highly fragmented market and lower profitability – Ebitda margin, ex-Sports losses, could converge to 14 per cent, it said. Elara sees 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) as concerns.
"Merger with Sony was the key valuation driver to move up in the past two years. But given the termination, we downgrade ZEE to Sell with March 2025E target pared to Rs 170 from Rs 340. But if the Disney contract is honoured, target price may move to Rs 130. Possibility of any other strategic/financial partner buying majority stake in Zee could provide respite to valuation multiple," Elara said.
Emkay Global said the situation is a lose-lose for both players, particularly in the face of competition from the bigger potential entity Reliance-Disney. The termination, said Emkay Global, should also result in a legal tussle between the two embroiled companies, as implied in their press release.
"We believe this breakdown can also spur shareholder activism against the ZEE management. Further, we reckon that ZEE will now draw other suitors for potential deals. Currently, we downgrade the stock to SELL (from Buy) due to weak competitive positioning and escalated corporate governance issues. We pull our target down to Rs 175 at 8 times Dec-25E SA broadcasting Ebitda (from Rs 315)," Emkay said.
Nuvama Institutional Equities believes ZEE near-term valuation will stay suppressed due to Sony seeking a termination fee, uncertainty with respect to ZEE's new strategy and partners, and action of its minority stakeholders.
"Our positive stance was predicated on the merger. Given the change in industry dynamics and slower ramp-up of ad revenue; we are cutting FY25E/26E EPS by 16 per cent/24 per cent; downgrade to ‘REDUCE’ with target of Rs 190 (13 times PE FY26E)," it said.
CLSA also has cut its target on ZEE to Rs 198 from Rs 300 earlier as it believes the competition should intensify with the reported merger of Reliance and Disney Star. "We believe ZEE's PE will slump back to 12x levels, seen prior to the Sony merger announcement (August 21). This was also the period of Covid-19 second wave, while Zee’s stock PE had also de-rated in the past during the promoter share pledging crisis (in 2019) and the fall in business cash conversion," CLSA said.
ZEE Entertainment Enterprises Ltd valuations could take a severe hit in the near-term following the termination of merger deal by Sony India on account of alleged breaches of merger cooperation agreement (MCA) terms. A handful of brokerages revised their recommendations on the stock to 'Sell', as Sony sought $90 million in termination fees. The deal termination is a lose-lose for both the parties, analysts said as they cut their prevailing target prices on ZEE by up to 50 per cent.
ZEE's corporate governance was in focus in the past, when the stock had de-rated during the promoter share pledging crisis in 2019 and a fall in business cash conversion. The Zee-Sony merger would have addressed ZEE's low promoter ownership challenge, analysts said while anticipating shareholder activism against the ZEE management in coming days.
ZEE may see a sharp de-rating in P/E valuation of its broadcasting business to at least 10 times one-year forward or lower, due to the unfinished merger, as linear TV growth has converged sharply, said Elara Securties.
ZEE may not have any potential to scale-up OTT offering in a highly fragmented market and lower profitability – Ebitda margin, ex-Sports losses, could converge to 14 per cent, it said. Elara sees 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) as concerns.
"Merger with Sony was the key valuation driver to move up in the past two years. But given the termination, we downgrade ZEE to Sell with March 2025E target pared to Rs 170 from Rs 340. But if the Disney contract is honoured, target price may move to Rs 130. Possibility of any other strategic/financial partner buying majority stake in Zee could provide respite to valuation multiple," Elara said.
Emkay Global said the situation is a lose-lose for both players, particularly in the face of competition from the bigger potential entity Reliance-Disney. The termination, said Emkay Global, should also result in a legal tussle between the two embroiled companies, as implied in their press release.
"We believe this breakdown can also spur shareholder activism against the ZEE management. Further, we reckon that ZEE will now draw other suitors for potential deals. Currently, we downgrade the stock to SELL (from Buy) due to weak competitive positioning and escalated corporate governance issues. We pull our target down to Rs 175 at 8 times Dec-25E SA broadcasting Ebitda (from Rs 315)," Emkay said.
Nuvama Institutional Equities believes ZEE near-term valuation will stay suppressed due to Sony seeking a termination fee, uncertainty with respect to ZEE's new strategy and partners, and action of its minority stakeholders.
"Our positive stance was predicated on the merger. Given the change in industry dynamics and slower ramp-up of ad revenue; we are cutting FY25E/26E EPS by 16 per cent/24 per cent; downgrade to ‘REDUCE’ with target of Rs 190 (13 times PE FY26E)," it said.
CLSA also has cut its target on ZEE to Rs 198 from Rs 300 earlier as it believes the competition should intensify with the reported merger of Reliance and Disney Star. "We believe ZEE's PE will slump back to 12x levels, seen prior to the Sony merger announcement (August 21). This was also the period of Covid-19 second wave, while Zee’s stock PE had also de-rated in the past during the promoter share pledging crisis (in 2019) and the fall in business cash conversion," CLSA said.