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ZEEL-Sony India agree on merger

Zee Entertainment Enterprises (ZEEL) and Sony Pictures India (Sony) have entered into a non-binding agreement to merge their operations in India with post-merger stake of 47% for existing ZEEL shareholders and 53% for Sony; it would also include Sony infusing cash of US$1.575bn. ZEEL MD&CEO Punit Goenka will retain the same position in the merged entity and ZEEL will retain one Board seat in it with majority of the Board members to be nominated by Sony. However, the EGM called by Invesco, ZEEL largest shareholder, to remove Mr. Goenka from the Board remains a risk for the deal.

Sony has also agreed to transfer certain stake to ZEEL promoters to maintain their stake at 4% as non-compete fees, and ZEEL promoters will have the option to increase their stake up to 20%. ZEEL has not disclosed much on merger cost synergies, but we do anticipate material savings. Key to watch would be the upcoming EGM, and filing of a binding agreement for the merger. We have updated our model to factor ZEEL’s FY21 annual report. Our target price raise to Rs374 (from Rs200) as we raise the FY23E P/E multiple to 22x (from 12x). Upgrade ZEEL to ADD (from Hold).

* ZEEL Board approves merger with Sony. ZEEL Board of directors has unanimously provided in-principle approval for merger with Sony. The two companies have entered into a non-binding agreement to combine their assets in linear, digital, production and programme libraries. Sony’s stake in the merged entity will be 38.75% on merger and it will acquire an additional 14.18% with infusion of growth capital of US$1.575bn (Rs116bn); this will give Sony the majority stake. On consummation of the transaction, ZEEL shareholders will have 47.07% stake and Sony 52.93%. The cash infusion by Sony works out to Rs246/sh resulting in a valuation of Rs503bn for the merged entity. Further, majority of Board members will be nominated by the Sony group while Mr Punit Goenka will remain MD&CEO for at least five years and ZEEL will also retain one Board seat.

* Non-compete payment to ZEEL promoters needs minority shareholders’ approval. Sony has agreed to pay ZEEL promoters a non-compete consideration wherein it will transfer its merged entity share to ZEEL promoters in a proportion that would take their shareholding to 3.99%. This will effectively bring down Sony’s shareholding post transfer to ~51%. ZEEL promoters will also have the option to increase their stake up to 20% of the merged entity though modalities are not fixed. Non-compete fees will require majority approval of minority shareholders and will be part of the composite merger agreement.

* New Board will decide on cash utilisation of US$1.745bn. Capital allocation decision will be taken by the new Board, and the merged entity may invest across linear entertainment, sports and digital assets. ZEEL remains confident of generating the required IRR on new cash deployment, but we believe investment in sport and digital genres may have much longer payback period.

* ZEEL and Sony have very limited overlap. Sony Pictures India is whollyowned subsidiary of Sony Corporation, Japan. It has 26 channels in India including 10 in sport and three each in Hindi GEC and movies. Sony has limited regional presence in Marathi and Bangla GECs. Sony channel portfolio has limited overlap with ZEEL with Sony Hindi GEC focused at non-fiction and is strong in the comedy genre. Besides, Sony has a large movie library, which should further strengthen the already strong ZEEL library. In addition, Sony has digital presence – Sony Liv. However, we see scope for some channel rationalisation, which should help drive cost synergies for the company.

* Revenue synergies on merger seen at 6-10%. ZEEL remains comfortable with likely revenue synergies of 6-10% with the expanded bouquet of channels post-merger, and improved reach. It also sees some synergy benefit in subscription revenues. Though the company has not spoken on potential cost synergies, we believe channel rationalisation, personnel and SG&A expenses could lead to material savings.

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