Zee Entertainment - Merger Dissolution With Sony Will Lead To De-Rating: Prabhudas Lilladher

Prabhudas Lilladher Report

We downgrade our rating to ‘Reduce’ from 'Buy' with revised target price of Rs 151 after assigning a multiple of 12 times to our Sep-25 earnings per share of Rs 13 as Sony has terminated its merger cooperation agreement with Zee Entertainment Enterprise Ltd.’s.

Apart from sharp de-rating in valuation multiple, we believe dissolution of merger will not only result in a financial strain on Zee on account of termination charge, but also creates an uncertainty surrounding the pay-out relating to ICC rights putting its sports aspirations on backburner.

In addition, Zee is now saddled with irreversible sunk cost of Rs 3.7 billion incurred towards merger.

We believe de-rating in valuation multiple will be sharp as governance discount would now come into play and apt benchmarking history would be a year prior to Covid.

Downgrade to ‘Reduce’ as dissolution has not only brought governance risks to the fore, but has also weakened Zee’s competitive positioning in a market which is under consolidation mode.

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