Zee plummets 30% as Sony calls off merger; CLSA downgrades stock to 'sell'

With Zee-Sony merger being terminated, we believe Zee's price-to-earnings (PE) will slump back to 12x levels, seen prior to the Sony merger announcement, CLSA said

Shares of Zee Entertainment Enterprises (ZEEL) plunged 29.98 per cent to their intra-day low of Rs 162.25 on BSE in Tuesday's trade after Sony Pictures Networks, a wholly-owned subsidiary of Sony Group, called off the merger with the company.

Sony Pictures issued a termination notice to ZEEL on their merger agreement on Monday. The Japan-based media giant has also sought $90 million in termination fees from ZEEL.

Several analysts have downgraded the stock post the development. Read in detail

The average rating of the 19 analysts covering Zee has dropped to "hold" from "buy, as per Reuters. 

Foreign brokerage CLSA has downgraded ZEEL from 'Buy' to 'Sell' with a revised target price of Rs 198 (from Rs 300).

"With Zee-Sony merger being terminated, we believe Zee's price-to-earnings (PE) will slump back to 12x levels, seen prior to the Sony merger announcement (August 21). This was also the period of Covid-19 second wave, while Zee's stock PE had also de-rated in the past during the promoter share pledging crisis (in 2019) and the fall in business cash conversion," CLSA said in its report.

It further added that Zee's corporate governance has been in focus, more so since the unprecedented promoter share pledging crisis of 2019 wherein Zee promoters (the Essel Group) repaid loans with multiple stake sales to investors in Zee and promoter's shareholding came down from 42 per cent to 4 per cent. 

"Zee-Sony merger would have addressed Zee's low promoter ownership challenge as post-merger Sony would have owned 51 per cent," it said.

Analysts at Motilal Oswal Financial Services (MOFSL), too, have downgraded the stock to 'Neutral' with a target price of 200 (18x on one year forward P/E).

"If we assume zero value for the OTT business and assign 10x to current Linear TV Ebitda (H1FY24 annualised), the stock would be valued at Rs 230 per share. However, if we assume no material recovery in OTT's profitability and ascribe 15x on FY26E PAT of Rs 1,070 crore (factors some recovery in linear TV business and adjustments for recent one-offs), the stock would be valued at Rs 167 per share," the brokerage firm said.

On Monday, ZEEL said its board took on record communications received from Culver Max Entertainment Pvt, (formerly Sony Pictures Networks India) (Culver Max) and Bangla Entertainment Pvt. to terminate the merger cooperation agreement dated December 21, 2021, and seeking a termination fee of $90 million on account of "alleged breaches" by ZEEL of the terms of the merger agreement, invoking arbitration and seeking interim reliefs against ZEEL.

The company further said it categorically refutes all claims and assertions made by Culver Max and BEPL regarding alleged breaches of the MCA by ZEEL, including their claims for the termination fee, and reserves all its rights in this matter.

The company is evaluating all available options and basis the guidance received from the Board and will take all necessary steps to safeguard the long-term interests of its stakeholders, including by taking appropriate legal action and contesting Culver Max and BEPL's claims in the arbitration proceedings, ZEEL said.

ZEEL had inked the merger cooperation agreement with Culver Max and BEPL on December 21, 2021, in relation to the composite scheme of the arrangement, which was approved by the Mumbai bench of the National Company Law Tribunal (NCLT) in August 2023.