 "Analysts downgrade Zee Entertainment stock after Sony deal falls through")
Analysts sharply cut the target price (TP) for Zee Entertainment Enterprises (Zee) and downgraded its stock after Sony Pictures Networks India decided to call off the proposed merger.
Global brokerage firm CLSA downgraded the stock to ‘sell’ and cut its TP to Rs 198 from Rs 300. Nuvama Institutional Equities also said the stock may slip below Rs 200, while Elara said the stock could fall to as low as Rs 130.
Shares of ZEE last closed at Rs 231 on the National Stock Exchange on Saturday. As Zee is part of the derivatives segment, there are no price bands for the stock and analysts believe the stock could open sharply lower on Tuesday.
On Monday, Zee received a notice from Sony on termination of the merger agreement dated December 21, 2021. Sony also demanded a $90 million termination fee on account of alleged breaches of the merger cooperation agreement (MCA), a charge that Zee has denied.
“With the merger terminated, Zee’s valuation will likely decline to 12 times price-to-earnings (PE) levels (August 2021) seen prior to the merger announcement. The stock had de-rated in the past during the promoter share pledging crisis (in 2019) and fall in business cash conversion. Also, competition should intensify with the reported merger of Reliance and Disney Star,” said a CLSA note led by analyst Deepti Chaturvedi.
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“With the merger being called off, the TP for Zee could be in the range of Rs 130 (including sports losses) and Rs 170 (ex-sports losses, assuming Zee does not fulfill sports rights commitment with Disney),” said Elara Capital’s Karan Taurani in a note.
He said that Zee’s revenue and profit growth had been muted over the past two years and the company had seen its margins erode but the merger with Sony was the key driver behind valuations moving up.
“We believe Zee will see a sharp de-rating of PE valuation multiples towards at least 10x one-year forward or lower, due to the merger potentially being called off, as linear TV (television) growth has converged sharply. Zee may not have any potential to scale up OTT (over-the-top) offering in a highly fragmented market; lower profitability—Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin ex-sports losses could converge towards 14 per cent, and any further write-offs on the inventory side or matters pertaining to related-parties creditors, or not honouring the sports contract with Disney (ICC tournaments - Zee could have potentially paid half of the $3 billion value for TV rights),” the Elara note said.
Abneesh Roy of Nuvama added: “[In the] near term, the stock will be under pressure and go back to its pre-merger multiple of 12-13x PE multiple. Given uncertainties on a new partner, a legal case with Sony of $90 million, and a likely deal between Viacom of RIL and Disney, [Zee] will be a risky bet to bottom fish.”
A bottom fisher refers to an investor looking to buy stocks that have seen strong correction recently.
Street expects institutional shareholder action
With promoter shareholding in Zee at just under 4 per cent, analysts said it remains to be seen what large institutional shareholders of the company do to prevent an erosion in value of their holdings. They may float a resolution and call for an extraordinary general meeting (EGM) to oust the board and the management and then strike a deal with another media company, according to analysts.
With a 7.3 per cent stake, ICICI Prudential Value Discovery Fund is currently the largest shareholder of the company followed by Nippon India AMC (6.1 per cent), HDFC Mutual Fund (5.3 per cent) and LIC (5.1 per cent).
“It is our policy not to comment on individual investments undertaken by the schemes managed by us,” said an ICICI Prudential AMC spokesperson.
Meanwhile, individual shareholders, who hold nearly 15 per cent in Zee, were also planning to write to the markets regulator and other regulatory authorities to intervene in order to safeguard their rights.