Despite NCLT setback, analysts remain positive on Zee Entertainment

Their sum-of-the-parts valuations ranges between Rs 275 and Rs 390, which indicates uncertainty

The National Company Law Tribunal’s (NCLT’s) declaration that Zee Entertainment is bankrupt adds a new measure of uncertainty to the proposed merger with Sony.

Three entities -- Aditya Birla Finance, IndusInd Bank and YES Bank -- have filed appeals in the NCLT for recoveries of Rs 130 crore, Rs 90 crore and Rs 540 crore, respectively. The money was borrowed by a related party – Siti cable – and not returned. Zee was a corporate guarantor.

The NCLT has declared Zee insolvent in the case with IndusInd Bank for recovery of Rs 150 crore. There are also disputes in these cases since the claimed interest charges and penalties are extremely high. Apart from these cases, there is also an ongoing legal dispute with IPRS (The music body), with a demand for royalty of Rs 150 crore.

Zee applied for permission for the merger with Sony in January 2023, after receiving approvals from shareholders, stock exchanges and the CCI (Competition Commission of India).

While the next NCLT hearing for the plea is supposed to take place on March 9, the cases make it unlikely that the merger will be immediately approved. While Zee may pay up and settle the outstandings or may file for an appeal but it would be prudent to assume there will be delays about the merger.

The third quarter of the 2022-23 financial year (Q3FY23) was hit by an exceptional charge of Rs 169 crore pertaining to merger expenses and provisions for outstanding exposures towards Zee Learn & Siti Networks. Revenues were flat year-on-year (YoY) at Rs 2,111 crore, while advertisement revenues declined 15.6 per cent YoY to Rs 1,063 crore though subscription revenues increased 13.2 per cent YoY to Rs 894 crore. The Ebitda (earnings before interest, tax, depreciation and amortisation margin was at 16 per cent and Ebitda declined 29.5 per cent YoY to Rs 338 crore. Adjusting for the one-off charge of Rs 169 crore, profit after tax or PAT declined 41.4 per cent YoY to Rs 187 crore with a margin of 9 per cent.

Given the muted performance and unstable macro-environment, the merger is the only clear route to positively re-rating of the stock. Synergies would cut costs and there is potential to become the number one broadcaster.

The advertising revenue stream is unlikely to see a big pickup in the first half of FY24. Industry watchers believe that TV as a medium will continue to co-exist with the digital form in the medium term and synergies for the merged entity, which cut costs, would be reinforced by a strong topline since there’s minimal overlap in terms of content genre.

Sony's due diligence covered the guarantees provided to Siti Networks and the liabilities could be absorbed by the merged entity. Zee also has a cash balance of over Rs 600 crore, which is more than enough to cover the approximate Rs 440 crore of liabilities due to Siti.

As and when ensuing formalities for the merger are completed, the Zee stock will be delisted for 5-6 weeks since it is a reverse merger with Sony. Zee management guidance estimates 3-4 per cent revenue synergies from the merger, and there is also potential for lower content spend.

The stock was traded down to just below Rs 200, as the market absorbed the impact of the NCLT hearing. Interestingly, many analysts are positive on the stock, with sum-of-the-parts valuations ranging between Rs 275 and Rs 390. That wide range, however, indicates the level of uncertainty.