Zee shares correct 10% after Sony calls off $10-billion merger deal

In another big blow, Sony is also seeking a termination fee of $90 million citing alleged breaches of the merger co-operation agreement (MCA) by Zee Entertainment.

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Shares of Zee Entertainment Enterprises corrected 10 percent in opening trade on January 23 and were locked in its lower circuit at Rs 208.30, a day after Sony Pictures Networks India called off its $10-billion mega-merger with the Indian media giant.

The Zee-Sony merger deal, which was first announced two years ago, was caught in turmoil for quite some time. However, putting an end to the saga, Sony Pictures Networks, now known as Culver Max Entertainment, has officially terminated the deal.

The merger did not close by the end date, while “the closing conditions to the merger were also not satisfied”, which prompted Sony to call off the deal.

“Although we engaged in good faith discussions to extend the end date under the merger cooperation agreement, we were unable to agree upon an extension by the January 21 deadline. After more than two years of negotiations, we are extremely disappointed that closing conditions to the merger were not satisfied by the end date,” Sony Pictures stated in a statement.

Sony claims $90 million termination fee from Zee

Dealing another big blow to Zee Entertainment, Sony is also seeking a termination fee of $90 million, citing alleged breaches of the Merger Co-operation Agreement (MCA).

Sony has also initiated arbitration proceedings and is seeking interim reliefs against Zee Entertainment. In response, Zee Entertainment has denied all allegations made by Culver Max and Bangla Entertainment Pvt Ltd (BEPL) regarding breaches of the MCA terms, including their claims for the termination fee.

Zee is also gearing up to take legal action against Sony Pictures over the termination of the deal.

Impact on Zee stock: Price targets slashed, valuation to slump

Following the unfavourable end-result of the merger plans for Zee, global brokerage firm CLSA has downgraded the stock to a ‘sell’ call from the earlier ‘buy’ while sharply slashing its price target for the stock by 34 percent to Rs 198.

“We believe 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,” said Karan Taurani, research analyst at Elara Securities.

CLSA also agrees as the firm believes the scrapping of the merger will see Zee’s PE will slump back to 12x levels, seen before the announcement of the deal in August 2021. “Competition for Zee will also intensify with the reported merger of Reliance and Disney Star,” the brokerage said in a note.

Amit Kumar Gupta, founder and CEO of Fintrekk Capital also seconded concerns over a sharp correction in Zee’s valuation as the media giant and its associated companies struggle with debt and holding shares pledged with lenders, for which they need cash to keep the shop running.

“Zee Entertainment’s consolidated revenue from operations has also stagnated, and its operating profit margin has fallen to less than half. Net profit margin has gone from a healthy 19 percent in FY19 to just 3 percent in FY23,” Gupta said. He also forecast Zee to have difficulties in surviving if the Reliance-Disney deal actually fructifies.

Amid the pool of negative sentiments for Zee, Sham Chandak, head of institutional broking at Elios Financial Services, feels that the only saving grace for the stock could be another Indian media house showing interest in acquiring Zee. “And that is a big ‘if’,” Chandak said.

No relief for Zee, even with another white knight

“Despite that, even if some other corporate house was to step in to buy out Zee, expect a sharp markdown in valuation,” he added.

In response to the deal being called off, AK Prabhakar, head of research at IDBI Capital believes Zee’s stock will likely fall below its 52-week low of Rs 170. “Everyone was placing their bets on the merger but with no triggers in place now, and the promoter’s stake being hardly 4 percent, we think there is no skin in the game. Investors can buy out if there is a correction from here on,” Prabhakar said.

Aditya Agarwala, co-founder and director of Invest4Edu, also expects a negative impact on the stock, with a gap-down open in the stock on January 23.

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

On the technical front, Agarwala sees a move below Rs 229 dragging the stock lower to levels of Rs 200-180. “Further, a fall below Rs 180 will trigger a breakdown which could extend the correction to levels of Rs 160-130, while resistance sits at Rs 265-290 on the upside,” Agarwala said.

Shares of Zee have had a rollercoaster ride through 2023 as it got tangled in multiple fiascos. At the start of the year, lender IndusInd Bank approached the NCLT to initiate insolvency proceedings against Zee, a move that could have threatened the merger by stopping all transactions, including asset transfers.

The proposed merger also grappled with legal challenges due to opposition from several creditors, including Axis Finance and JC Flower ARC, among others.

Even though the scrapping of the deal finally closed a major chapter for Zee, the bitter aftertaste is likely to irk investors of Zee Entertainment as well as the stock.

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

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.