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JMFL
Zee Enertainment (Buy)
CMP: ₹442.45
Target: ₹530
Zee management hosted a conference call after announcement by promoter of their intention to sell up to 50 per cent of their equity stake to a strategic partner [SP]. Management categorically stated: 1) they would be looking for technology and global expertise while considering any SP; and 2) they are open to partnership at multiple levels including Zee5, the OTT subsidiary of ZEEL.
In our view, prospect of a 10-20 per cent stake in ZEEL alone, is unlikely to attract desired SPs, and therefore Zee may also have to offer a significant minority stake or perhaps even a controlling stake (51 per cent) in Zee5 to incentivise the prospective SPs.
Assuming all-primary deal in subsidiary Zee5 and all-secondary deal in ZEEL, we estimate: 1) Zee5 can potentially raise ₹2,500 crore in return for a 40 per cent stake (post issue) based on a 20 per cent hair-cut to our DCF value [₹3,800 crore pre-money]; and 2) Essel Group can raise ₹4,000 crore by selling 10 per cent in ZEEL at a 5 per cent discount to CMP of ₹438.
We expect Zee share price to be range-bound in the near-term, given continued overhang from high promoter share-pledge and potentially positive news flow around the strategic review undertaken by Zee promoters. Our December 2019 TP is ₹530 and rating is ‘Buy’.
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