Zee - Sony deal allays investor concerns; stock may get re-rated: Analysts

Markets have given a thumbs up to the Zee Entertainment - Sony Pictures India merger news with the stock of the Punit Goenka controlled firm hitting the upper circuit of 20 per cent at Rs 306.75 on the BSE. This is also the 52-week high level for the counter.

The deal, analysts say, should put to rest investor's concerns regarding corporate governance issues, and can result in significant re-rating for the stock going ahead. It currently trades at around 16/14x FY23/24 earnings.

"Surprisingly, Zee promoters stake would stay at 4 per cent (same as the current) if they agree for non-compete agreement. Zee promoters have an option to increase stake up to 20 per cent over a period of time. Sony is strong in the Hindi GEC segment (especially in the non-fiction space) where Zee has lost ground. Zee is strong in movies (across genres) and regional GEC space. Zee has around 17 per cent network viewership share and Sony should be nearly 10-12 per cent in our view. Thus, it would be a good strategic fit from broadcast, digital and content perspective," said Himanshu Shah, an analyst at Dolat Capital.

Among the other Essel Group stocks, Dish TV India surged 10 per cent to Rs 21.54 on the BSE. Zee Media Corporation hit the upper circuit of 5 per cent at Rs 12.36, while Zee Learn was up 20 per cent to Rs 16.64 on the BSE in intraday trades. In comparison, the S&P BSE Sensex gained 0.27 per cent at 59,162 points.

“The deal is a win-win for both the companies and investors. While Zee will get the financial backing of a foreign entity, Sony will get a better hold on the movies segment where Zee has a strong presence. Shareholders, on their part, can be assured of corporate governance issues, if any, being put to rest. All this can be a good trigger for the stock going ahead," said G Chokkalingam, founder and chief investment officer at Equinomics Research.

As part of the transaction, Punit Goenka will continue to be the managing director and chief executive officer (CEO) of the merged entity. That apart, the majority of the Board of Directors of the merged entity will be nominated by Sony Group, the company said.

“The deal allays a number of concerns, especially with regard to investment in related companies and other corporate governance issues. The existing management will only be a minority shareholder in the new setup (provided all approvals come through) as their holding is capped at 20 per cent. Another positive is that the management control will pass on to an existing multinational company that has a presence in the media segment. All this should see the stock get re-rated over time," explains A K Prabhakar, head of research at IDBI Capital.

Last week, on September 14, 2021, ace investor Rakesh Jhunjhunwala's Rare Enterprises had bought 5 million equity shares of ZEEL at Rs 220.44 per share through bulk deal transactions on NSE. BofA Securities Europe SA, meanwhile, purchased 4.86 million shares at an average price of Rs 236.2 apiece, the NSE bulk deal data shows. The names of the sellers were not ascertained immediately.

Invesco Developing Markets Fund and OFI Global China Fund LLC, which own a combined 17.88 per cent of the ZEEL, called for an extraordinary shareholders’ meeting to remove Punit Goenka (promoter) as director. They also called for the removal of two non-executive directors Manish Chokhani and Ashok Kurien, who resigned on September 13. Additionally, they have sought appointment of six independent directors on the board.