Zee nosedives 30% in worst single-day fall after Sony scraps deal

After the deal with Sony was terminated, nearly half a dozen brokerages downgraded Zee's stock while lowering the earnings multiple assigned to the cash-strapped company

Shares of Zee Entertainment Enterprises (Zee) slumped 30.5 per cent, its worst single-day fall, after the broadcaster's $10-billion merger with Sony Pictures Networks India collapsed, stoking concerns of its survival.

The Zee stock ended at Rs 160.9, down Rs 70.5 or 30.5 per cent, over its previous close on the National Stock Exchange (NSE). 

The Punit Goenka-led firm lost nearly Rs 7,300 crore in market value. Shares of Zee worth nearly Rs 4,000 crore traded on the NSE and BSE.

The stock was down less than 20 per cent for most parts of the day as investors assessed the right value for the company.

 

However, the sell-off accelerated after a news report alleged that Securities and Exchange Board of India’s (Sebi’s) investigation revealed that Zee promoters had siphoned off Rs 800-Rs 1,000 crore from group companies. This is higher than the earlier estimates of Rs 200 crore.

After the deal with Sony was terminated, nearly half a dozen brokerages downgraded Zee’s stock. They lowered the earnings multiple assigned to the cash-strapped company.

“Zee’s near-term valuation will stay suppressed due to Sony seeking a termination fee, uncertainty with respect to Zee’s new strategy and partners, and action of its minority stakeholders. Our positive stance was predicated on the merger. Given the change in industry dynamics and slower ramp-up of ad revenue, we are cutting FY25E/26E EPS by 16 per cent/ 24 per cent. We are downgrading to ‘Reduce’ with a target price of Rs 190 (13x PE FY26E),” said Abneesh Roy, analyst at Nuvama Institutional Equities.

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.

“Reliance’s Viacom and Disney+Hotstar deal will get wrapped up soon (with Reliance holding 51 per cent). Both the entities together hold major cricket broadcasting rights such as IPL, ICC and other Indian bilateral cricket series. For Zee to be a serious player in sports and scale up OTT, it would need a financial partner,” added the Nuvama report.

With promoter holding of less than 4 per cent and allegations of misuse of funds against them, there is a huge uncertainty over Zee’s outlook, said market watchers.

“We do not expect a recovery in earnings in the near term. Zee has not stated whether it will pursue the merger while the litigation with Sony could hinder improvements in operations or explore a merger with other players. It is unclear what path Zee may take, going ahead, and there is limited clarity on the long-term outlook of the business,” said Aliasgar Shakir of Motilal Oswal, in a note.

“With the merger being called off, the target price for Zee could be in the range of Rs 130 (including sports losses) and Rs 170 (ex-sports losses. This is after assuming Zee does not fulfil sports rights commitment with Disney,” said Elara Capital’s Karan Taurani, in a note.

He said Zee’s revenue and profit growth had been muted over the past two years. Also, the company had seen its margins erode but the merger with Sony was the key driver behind the valuations moving up.