This morning Sony sent a notice to ZEEL that it has terminated the proposed merger between the two companies. Elara Capital senior VP Karan Taurani feels that this will have a negative impact on both parties as they are facing stiff competition. On the content front there is the question of what happens with the International Cricket Council (ICC) TV rights which Disney Star has sublicensed to Zee. Sony could have to pay a penalty of $100 million, for calling of the merger as per media reports. At the same time there is also the potential of a local Indian conglomerate buying out Zee.
- As per Sony’s official intimation, they have terminated the merger, by rejecting the extension proposal by Zeel.
- He noted that this will have a negative impact on both parties, as both companies are going through stiff competition from digital media and face a potential threat from the merger of RIL/Disney over the near term
- He believes in case of the merger being called off – the worst-case target price for Zee could be in the range of Rs. 130 (including sports losses) and Rs. 170 (ex-sports losses – assuming that Zee does not fulfil sports rights commitment with Disney)
- Zee has reported a muted performance in terms of growth and profitability over the last two years, as revenue growth has converged to 2.2% (FY20-24E) and EBITDA margin dipped to 10.2% (9MFY24E), due to 1) losses in the OTT segment and 2) lower growth in linear TV segment
- He fiurther points out that Zee had also signed a contract with Disney for sub franchise of sports (ICC tournaments) rights on the linear TV side. It had estimated annual losses of approximately Rs. 15.2 billion due to the same in FY25 and beyond, due to 1) hefty content cost, 2) lower sports ad revenue and 3) cricket content being available free on OTT. Zee may not fulfil its commitment on the same (has a cash balance of mere Rs. 6 billion, versus a potential contractual obligation of Rs. 40 billion per year) as the above was a strategic decision which could reap benefits due to the Zee/Sony merger. There could be a negative impact of a penalty/legal proceedings on the above for Zee, however PAT will see a positive impact due to absence of sports losses in FY25 and beyond.
- He believes that Zee will see a sharp de-rating of PE valuation multiples towards at least 10x one year fwd. or lower, due to the merger potentially being called off, as 1) linear TV growth has converged sharply , 2) Z may not have any potential to scale up OTT offering in a highly fragmented market, 3) lower profitability – EBITDA margin ex sports losses could converged towards 14% and 4) 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 – Z could have potentially paid half of the USD 3bn value for TV rights)
- There is also some likelihood of the shareholders – top five shareholders owning ~30% of Z put together, who may work together to do the deal with Sony and without Mr Punit Goenka; however, the process is time consuming (6-12 months) and may lead to multiple legal hurdles between the promoter and institutions; there is also a potential of a local Indian conglomerate buying out Zee, if at all which too could provide some respite to valuations
- Sony could have to pay a penalty of $100 million, for calling of the merger as per media reports; he foresee that too will go through a legal hurdle due to disagreement between the two parties
- However, over the near term, he foresees the valuations to be under pressure, as merger with Sony was the key driver for valuations to move up over last two years.
