Zee plunges 20%, hits lower circuit after Sony calls off merger; triggers downgrades

Brokerages such as Citi, CLSA and Motilal Oswal Financial Services have downgraded Zee Entertainment, forecasting a slump in valuations and increase in competitive intensity in the sector

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The Zee Entertainment Enterprises’ stock tanked 20 percent in the opening trade on January 23, a day after Sony Pictures scrapped its $10-billion merger with the Indian media giant.

Brokerages anticipate a sharp slump in Zee’s valuation following the deal falling apart, prompting a slew of downgrades.

At 11.30 am, Zee was locked in lower circuit at Rs 185.15 on the National Stock Exchange.

Sony cited delays in closing the deal by the end date and lapses in meeting closing conditions of the agreement as reasons for calling off the merger. The firm is also seeking a termination fee of $90 million on account of alleged breaches of the Merger Co-operation Agreement (MCA).

Zee Entertainment has denied Sony’s claim of breach of the MCA terms, including the demand for the termination fee.

UBS Securities said the cancellation of the merger is a negative development for Zee, anticipating its implied value per share to drop 20 percent from the current Rs 190.

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CLSA, too, forecasts a slump in valuation from the 18x to 12x after the merger termination. It also expects Zee’s challenge of low promoter ownership to further put pressure on the stock. Accordingly, it downgraded the stock to a “sell” from the earlier “buy” and slashed the price target for the stock by 34 percent to Rs 198.

Citi has also downgraded the stock to “sell” and reduced its price target by nearly half to Rs 180. With the merger having called off, the increasing competitive intensity in the media sector in the backdrop of the expected Reliance-Disney merger will take the centre stage. The firm also slashed is FY24-26 earnings estimate  for Zee by 22-38 percent,  assuming slower margin recovery.

Also read | CLSA downgrades Zee to ‘sell’ as Sony calls off merger; expects valuation to slump

On similar grounds, Motilal Oswal Financial Services also revised its rating for the stock downwards to “neutral” from “buy”, with a price target of Rs 200.

“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,” MOFSL said in a note.

Also read | Zee refutes all claims by Sony, says evaluating options

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