ZEE-SONY MERGER FALLOUT: STOCK ERODES ALL GAINS MADE SINCE DEAL ANNOUNCEMENT IN 2021
Brokerages such as Citi, CLSA and Motilal Oswal Financial Services have downgraded Zee Entertainment, forecasting a slump in valuations and increase in competitive intensity in the sector
Zee Entertainment Enterprises experienced a significant decline in its shares, plummeting by 30.50 percent on January 23. This decline broke a series of continuous lower circuits throughout the day and reached its lowest point in 52 weeks at Rs 152.50. The sharp fall in share prices occurred following the cancellation of a $10-billion merger between Sony Pictures’ Indian division and Zee Entertainment Enterprises.
As a result, several brokerages downgraded the stock, including global brokerage firm CLSA, which predicted a decrease in valuation from 18x to 12x after the termination of the merger. This decline in Zee’s stock price wiped out all the gains it had made since August 2021 when the merger plans with Sony Pictures were initially announced.
By the end of the trading day, Zee’s shares settled at Rs 160.90 on the National Stock Exchange, marking a 30.50 percent decrease from the previous close. The circuit levels were subsequently adjusted to 15 percent, 20 percent, 25 percent, and 30 percent.
Sony has stated that the reason for calling off the merger with Zee Entertainment is due to delays in closing the deal and failure to meet the closing conditions of the agreement. They are also seeking a termination fee of $90 million for alleged breaches of the Merger Co-operation Agreement (MCA). However, Zee Entertainment has denied Sony’s claim of breaching the MCA terms and has rejected the demand for the termination fee.
UBS Securities has expressed concerns about the cancellation of the merger, predicting that Zee’s implied value per share may decrease by 20 percent from the current Rs 190.
CLSA, on the other hand, believes that Zee’s already low promoter ownership will face additional pressure, which will negatively impact the stock. As a result, they have downgraded the stock from “buy” to “sell” and have reduced the price target for the stock by 34 percent to Rs 198.
Citi has also downgraded the stock to “sell” and reduced its price target by nearly half to Rs 180. With the merger having been called off, the increasing competitive intensity in the media sector in the backdrop of the expected Reliance-Disney merger will take center stage. The firm also slashed its FY24-26 earnings estimate for Zee by 22-38 percent, assuming a slower margin recovery.
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