CLSA Downgrades Zee, Analysts Say Sony Calling Off Merger Is A 'Disaster'

The Sony Group calling off its merger makes Zee Entertainment Enterprises Ltd. vulnerable because of low promoter ownership and would likely trigger a derating, according to analysts.

Global brokerage firm CLSA downgraded Zee to 'Sell', citing the termination of the $10 billion deal. "With the merger terminated, Zee’s valuation will likely decline to 12 times PE levels seen prior to the merger announcement," CLSA said in a Jan. 22 note.

CLSA slashed the target price of Zee to Rs 198 apiece, implying a 15% decline from the current market price of Rs 231 apiece. The brokerage earlier had a 'Buy' rating with a target of Rs 300 per share.

Sony's India unit, Culver Max Entertainment Ltd., sent a termination letter to Zee, scrapping the deal, citing the terms that were not met.

The Zee stock has plunged over 18% so far this month amid concerns about the deal. The point of contention was whether Punit Goenka, who continues to face regulatory scrutiny, would head the combined entity.

According to Jinesh Joshi, research analyst at Prabhudas Lilladher, this is an "absolute disaster" given the deal has been stuck for two years, and he expects a derating for the stock. "For FY26, considering an EPS of Rs 14 and assuming a multiple of 12 times, the fair value of Zee arrived at is Rs 168," he said.

Sony's stronghold faces a shake-up as Disney and Viacom join forces, Joshi said.

Issues with Zee-Sony have been ongoing and finally, they have come to a conclusion, said Deepak Shenoy, founder and CEO of Capital Mind. Considering the promoter holding of 4% in Zee, it stands in a vulnerable position, he said.

"We believe the above will have a negative impact on both parties, as both companies are going through stiff competition from digital media and face a potential threat from the merger of RIL/Disney over the near term," said Elara Capital in its note.

Zee had also signed a contract with Disney for sub-franchise sports (ICC tournaments) rights on the linear TV side. Elara Capital had estimated annual losses of about Rs 1,520 crore due to the same in FY25 and beyond, due to hefty content costs, lower sports ad revenue and cricket content being available free on OTT.

It remains to be seen how the $90 million demand from Sony would be paid by Zee (subject to arbitration), considering it has cash in its book of Rs 565 crore as of September 2023, Joshi said.

Elara Capital also said that Zee may not fulfil its commitment as it has a cash balance of a mere Rs 600 crore versus a potential contractual obligation of Rs 4,000 crore per year, as the above was a strategic decision that could reap benefits due to the Zee-Sony merger.