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The shares of Zee Entertainment Enterprises Ltd rallied 31 per cent on Wednesday after the announcement of a merger with Sony Pictures.
Zee Entertainment Enterprises Ltd closed at ₹337.10 on the BSE, up ₹81.45 or 31.86 per cent on the BSE. It recorded a fresh 52-week high of ₹355.40 during the day. It had opened at ₹281.20 as against the previous close of ₹255.65. The company’s m-cap stood at ₹32,378.98 crore.
On the NSE, it closed at ₹333.70, up ₹78.00 or 30.50 per cent. It recorded a fresh 52-week high of ₹355.35.
Zee’s rally also pushed the Nifty Media Index up 13.57 per cent to 2,204.75. Nifty Media also recorded a fresh 52-week high of 2,267.95 during the day led by Zee.
Sony Pictures Networks India (SPNI) and Zee Entertainment Enterprises Ltd. (ZEEL) today announced that they are going to merge their operations. The companies have entered into an exclusive, non-binding Term Sheet to combine both companies’ linear networks, digital assets, production operations and program libraries.
While Subhash Chandra-backed Zee will own 47.07 per cent stake in the merged entity, the balance 52.93 per cent is to be held by SPNI shareholders. According to the term sheet, Zee’s promoter family will hold 4 per cent stake which can be increased to 20 per cent.
Sony Pictures Entertainment, the parent company of SPNI, would invest growth capital so that SPNI has a cash balance of approximately $1.575 billion at closing for use to enhance the combined company’s digital platforms across technology and content, ability to bid for broadcasting rights in the fast-growing sports landscape and pursue other growth opportunities.
The non-binding Term Sheet provides an exclusive negotiation period of 90 days during which ZEEL and SPNI will conduct mutual diligence and negotiate definitive, binding agreements. The combined company would be a publicly listed company in India. Sony Pictures Entertainment would hold a majority stake in the combined company while the current ZEEL Managing Director & CEO Punit Goenka is to lead the combined company.
The news comes soon after Invesco Developing Markets Fund (formerly Invesco Oppenheimer Developing Markets Fund) and OFI Global China Fund LLC, which together hold 17.88 per cent in Zee Entertainment called for an extraordinary general meeting of the shareholders of the company to seek the ouster of Subhash Chandra’s son Punit Goenka as the director of the company.
Analysts bullish
According to analysts, the merger can be perceived as a positive for the company’s stock.
Santosh Meena, Head of Research, Swastika Investmart Ltd said, “It was expected that Punit Goenka will not easily lose his positions and Zee may come up with a white knight or other counter offer but the market knew that it will be a win-win situation for Zee shareholders whether there will be any change in management and board or some other player come to buy a majority stake in the company.”
“The recent announcement of a deal with Sony will be a very positive trigger for Zee Ltd as it will have a quality promoter and that will ease the issue of corporate governance in the company. Though the deal is a non-binding agreement so it will take some time for more clarity but this deal will bring a good synergy for both the company to grow their businesses and the combined entity will become the largest player in the industry. The stock is trading at very attractive valuations and it is one of the strongest and FIIs favourite stocks in the media space and if this deal concludes then we may see a big rerating in the counter,” added Meena.
Ashwin Patil, Sr. Research Analyst (media) at LKP Securities said: “Sony is strong in the Hindi GEC segment (especially in non-fiction space) where Zee is weak. Zee is strong in movies (across genres) and regional GEC space. Zee has ~18% network viewership share and Sony should be ~10-12% in our view. Additionally, Sony is strong in Sports as well. Thus it would be a good strategic fit from broadcast, digital and content perspective."
According to Patil, Zee is likely to get significantly re-rated. It currently trades at ~23x/19x FY22/FY23 earnings.
Ravishu Shah - Managing Director & Co-Head Valuation, RBSA Advisors said, "Merger terms envisage non-compete arrangement between the promoters of Zee Entertainment Enterprises Limited ("ZEEL") and the promoters of Sony Pictures Networks India ("SPNI"), which will provide an incremental stake of ~2.1% to the ZEEL promoters in the merged company (indicative value of ~1,075+ crore).”
“It will be interesting to see how Regulators and Institutional shareholders respond to such non-compete arrangement with the promoters of a listed company as part of the merger process. It may be pertinent to note that SEBI Takeover code does not permit differential treatment between the promoter and public shareholders,” said Shah.
“Also, obtaining ZEEL shareholder approval for the proposed merger and for the continuation of MD and CEO of ZEEL as the MD and CEO of the merged entity for next five years may entail challenges considering the current stressed relationship between certain institutional shareholders of ZEEL and ZEEL Board/ Management. On an overall basis, the merger is expected to provide strategic synergies and the cash balance of nearly $1.57 billion of SPNI will provide growth impetus to the merged entity. Also, the proposed constitution of the Board of the merged entity (majority directors to be appointed by Sony), may help allay the concerns of certain institutional shareholders,” added Shah.
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