Zee-Sony settlement removes overhang but outlook stays uncertain: Analysts

Zee Sony merger settlement news: Any meaningful re-rating in Zee share price, analysts said, should happen in case ZEE finds a new partner or strategic investor

Zee Entertainment Enterprises  Ltd (ZEEL) and Sony’s India unit have agreed to withdraw all claims against each other related to their failed merger, removing a “key overhang” over the Indian media company, but analysts believe ZEEL’s share price is unlikely to be rerated anytime soon.

Any meaningful rerating would happen if it finds a new partner or strategic investor, they said.
 

“The settlement of merger dispute marks an end to a tumultuous journey of almost three years. While this settlement does remove a key overhang, lack of any major strategic investor does not inspire confidence,” said Pulkit Chawla, research analyst at Emkay Global Financial Services. The brokerage retained its ‘reduce’ rating with a target price of Rs 150.

 

ZEEL and its group company Bangla Entertainment reached “an amicable non-cash settlement” with Culver Max Entertainment, which operates as Sony Pictures Networks India (SPNI), on Tuesday.
 

The companies withdrew all claims against each other and said that none of them would have any obligations or liabilities to the other.
 

Analysts, however, are cautious about ZEEL’s outlook in a “tough” business environment. A key issue for the company is intensified competition against the larger combined entity of Disney-Reliance, they said.
 

Reliance Industries Limited, Viacom18 Media Private Ltd, and The Walt Disney Company said in February they would sign agreements to form a joint venture combining the businesses of Viacom18 and Star India. The $8.5 billion deal will have a combined user base of 558 million and create a giant player in the digital broadcasting industry. The Competition Commission of India (CCI) cleared it on Wednesday.
 

Analysts at Citi gave a ‘sell’ rating to ZEEL and a target price of Rs 137. “While the settlement of the disputes will allay investors’ concerns, we remain concerned about the potential impact of the company’s cost savings measures and revenue outlook amid rising competition and consolidation in the industry,” they said. On the bourses, ZEEL share price fell 4.2 per cent to Rs 144.4 per share in Wednesday’s intraday trade after soaring 11.45 per cent on Tuesday. It ended 3.45 per cent weak at Rs 145.65 per share as against a 74-point (0.09 per cent) rise in the benchmark BSE Sensex index.
 

Operational challenges
 

In the April-June quarter (Q1) of the current financial year (FY25), ZEEL reported a consolidated net profit of Rs 118.10 crore as against a net loss of Rs 53.42 crore last year.
 

ZEEL’s earnings before interest, taxes, depreciation, and amortisation (Ebitda) grew 75 per cent Y-o-Y to Rs 271.70 crore with Ebitda margin expanding to 12.8 per cent from 7.8 per cent in Q1 FY24 and 9.7 per cent in Q4 FY24.
 

Advertisement revenue declined 3 per cent as companies diverted spending to cricket and general elections.
 

Subscription revenues grew 9 per cent and other sales and services grew 71 per cent to Rs 232 crore, led by the box office success of Maidaan movie. Over-the-top (OTT), or streaming, revenue growth moderated to 15 per cent Y-o-Y but the vertical’s losses declined by 33 per cent quarter-on-quarter to Rs 180 crore.
 

Analysts said that except in Q4 FY24, ZEEL’s advertising growth has declined for eight quarters (on a Y-o-Y basis) though the fall slowed down lately. 
 

“Our FY25-27 earnings per share (EPS) are down 3-4 per cent as better margins are offset by dilution impact. Higher competitive intensity, given the impending Viacom18-Star merger, is a key risk. We lower revenues and raise margin estimates as we cut near-term OTT growth but push forward margin recovery,” said analysts at JM Financial in their Q1 results review report.
 

ZEEL has seen exits of some senior personnel in the last couple of months, including Animesh Kumar (president of HR and transformation), Punit Misra (president of content and international markets), Nitin Mittal (president and group chief technology officer), and Rahul Johri (president of business).
 

Punit Goenka, Zee’s managing director and chief executive officer, is up against India’s market regulator in alleged fund siphoning case.
 

Unfavourable verdicts in the Disney Star cricket rights and Goenka cases could derail Zee’s plans, analysts said.