Merger with Sony to rerate Zee stock, address governance issues: IIFL Securities report

The proposed merger of Zee Entertainment Enterprises Ltd with Sony India will not only largely address Zee’s corporate governance issues but also improve its reach and scale, according to an IIFL Securities report.

Moreover, the merged company’s $1.8 billion cash balance after the equity infusion from Sony Group—which will own a majority stake in the combined entity—will be used to step up investments, the report said.

“With the significant rerating that the consummation of the deal is likely to entail, we see a reasonable chance of the deal getting shareholder approval,” IIFL Securities said, putting a buy call on the stock.

Indeed, the biggest merger and acquisition (M&A) deal in India’s media sector brings cheer to the shareholders of Zee Entertainment, which has been facing shareholder activism and concerns over its corporate governance.

Zee Entertainment’s share price has shot up nearly 80% in the last two weeks. This has given some respite to its shareholders, who had seen the stock suffer for the past several months after the debt-laden promoters, Essel Group, all but lost control of the company. This had even prompted Zee’s institutional investors to call for removal of the CEO Punit Goenka, son of Essel Group head Subhash Chandra.

IIFL Securities said the merger may take six to eight months to consummate. It pegged a 50% probability of the deal going through. Based on that, it has set a new target price of Rs 406 a share, almost a fifth higher than Zee’s current market price. Its actual equity valuation of the merged company is even higher.

The target price means there could be still some steam left in the stock even after the sharp run-up over the past couple of weeks.

“We estimate +10% EPS accretion in FY24 on synergies and, based on 25x target PER, Sep-2022 equity value per share could be about Rs 490,” the report said.

The brokerage also said there are significant synergy benefits from the merger as Sony has considerable strength in sports, the kids’ genre and English content while Zee is strong in regional content and movies.

Risk elements for the Zee and Sony deal

To be sure, there is no surety that the deal would be executed as there are several factors that needs to be there for it to see the light of the day. Besides regulatory approval, 75% of the voting shareholders need to give their nod to the proposal that has been structured in a way that doesn’t give them the benefit of a mandatory open offer. The securities norms give exemption to deals struck via amalgamation or mergers.

On the flip side, the deal envisages special or differential treatment to Essel group with Sony giving a non-compete fee to Essel through stake that would allow it to retain 4% stake. This may raise concerns at the table of the authorities.

Then again, the deal envisages continuation of Punit Goenka as chief of the merged company. Key shareholders have been calling for removal of Goenka and it is not clear how the deal would progress if large institutional investors stick to their stand that they want him out.