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Sacrificing ‘Jewel in the Crown’
* Zee’s promoters have decided to sell up to 50% of their holding in the company to a strategic investor, which according to them is for pursuing disruptive technological developments and transforming the company into a Tech-Media player.
* Global strategic Tech-Media partner on board could drive long term goal of 1) global content distribution, 2) acquiring technology know-how, and 3) bring in capital requirement (if any). However, the first two goals could be achieved by entering into content tie-ups or strategic partnerships rather than stake sale. The stake sale shows the urgency to reduce significantly high promoter share pledging across the group companies and create liquidity for the promoter.
* The contours of the final deal will be closely watched, including the percentage of stake sale, the board seats offered, the potential investor’s interest in buying further stake in the medium term, the strategy to expand globally, and investments pertaining to it (if any).
* We continue to highlight that the changing media landscape will require higher content investments to sustain the leadership across the categories. Retain our SELL rating, with a DCF-based TP of Rs374 as the potential transaction will not change the structural derating that the traditional business may see over the medium to long term.
* Management is looking for a potential partner who will bring in technology, platform for expanding the global reach for its content, as well as long-term capital commitments (if needed). We believe global content distribution could have been achieved through tie-ups or partnerships with various players instead of selling stake.
* We are of the view that although bringing a strategic partner will help expand Zee’s content globally and will add value, incremental investments to create consumer stickiness on OTT platform will be essential.
* At this juncture, many questions remain unanswered and we will get more clarity once a transaction is announced. For instance, if any global broadcaster or an OTT player comes on board, the global strategy in content distribution will be a key thing to watch out for. An existing OTT player/broadcaster, which could be a potential stake buyer, might have its own platform, and in that case, the relevance of ZEE5 might get restricted to India and Zee’s content will be on a different platform.
* We do not believe that a potential strategic partner would be lured by the content library (ex-movies) as the value accretion will happen from the incremental original content delivery on OTT and consumer stickiness on it will be offset in part by the revenue loss that could happen in the traditional business in the medium term.
* The promoters’ intention to sell stake to prioritize capital allocation of the group is viewed as negative with Z IN being considered as the ‘Jewel in the Crown’. In addition, the high share pledging across the group companies and leverage at the promoter level could give an edge to the potential buyer in the impending negotiations.
* We continue to highlight that this transaction is being done to ease the liquidity at the promoter level. The promoters had sold >1% stake in Jan’18 at a price ~Rs590/share to ease promoter-level liquidity. In our view, even after this potential strategic stake sale, the promoters might not get a significant amount of money in hand after the share pledge release for group companies. However, the intent to invest in other businesses after selling the stake in Zee indicates that the value accretion that the promoters see in other businesses is higher than what Zee can offer.
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