So near and yet so far! That was the climax in the over two-year-long Zee-Sony merger saga. What was ideally a win-win deal for both, only if both parties had addressed a few pending issues, has now collapsed. With this, Zee investors are back to ground zero. So, what’s the epilogue to all this now?

Valuation support

It was a consensus view that the merger would actually go through despite the internal differences, and the deal getting scrapped was a case of a lower probability event playing out. The crash in Zee shares in recent weeks is a reflection of this, as the shares, till a few weeks back, were pricing in the merger.

At current price of ₹164.75, Zee shares trade at EV/Revenue (FY25) of 1.6 times and FY25 PE of 15 times (Bloomberg Consensus). This is compared to Reliance’s TV18 Broadcast trading at FY 25 EV/Revenue of 2.1 times and PE of 36 times. Further, the earnings for Zee are also negatively impacted by investments in its streaming business. Streaming businesses typically incur losses in early years, with payoffs flowing in later years. Combining the two, it needs to be noted that Zee is trading cheap on earnings that, to some extent, are already suppressed.

Hence, although volatility can continue next week if event-driven arbitrage investors have still not exited their positions fully, there is a strong case for valuation support to emerge for Zee around current levels.

This should work in favour of Zee investors in the near to medium term.

Can it re-rate

There are two ways in which a rerating can play out. One that can play out in the near term and another that may take a longer while.

For the stock to see any significant rerating in the near term, it will require a catalyst. The catalyst could be in the form of Zee’s non-promoter shareholders who own 96 per cent of the company swinging into action. In fact the Zee-Sony merger agreement was cobbled up in September 2021 when Zee promoters were under attack by a major shareholder then – Invesco, who at that time was pushing for an EGM to oust Zee CEO/MD – Puneet Goenka and also restructure the board.

It needs to be seen what the shareholders do now. While it is speculative now on exact steps, any action by them that will help remove the corporate governance overhang plaguing Zee should be a catalyst for the stock.

This apart, there is a case for PE multiple to expand on pure fundamental basis over the medium term given the long-term growth prospects for media industry in India. ZEE still holds a solid place in Indian media industry with 17.9 per cent TV network share (as of Q2FY24). This position should give it time to continue as an independent entity for a few more years if required to wait for a better M&A opportunity. Eventually at sometime now or later in the future M&A will be warranted, given the changing dynamics of the media industry to streaming-driven world.

Zee investors need to factor the above as news keeps flowing every other day on Zee. Valuation support and scope for action by shareholders are supportive factors as news and uncertainty swirl.

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