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Zee-Sony merger one step closer to completion

CCI has approved the merger between the SONY and Zee Entertainment, subject to certain conditions. As per Media reports, the merged entity may exit the Marathi GEC in a bid to allay CCI concerns on four segments, including Hindi GEC, movies, and Bengali channel. The next pit stop is to seek shareholder approval, with meeting scheduled on 14th Oct’22. Clearly, the merger process has taken longer than the management expectation of 9-10 months, but once the Shareholder approval is in place, the merger process should be largely procedural and may conclude by 4QFY23.

A media powerhouse

In our earlier report, we have highlighted how the merger of Zee-Sony could make it a force to reckon. The Zee–Sony combined entity’s linear channel portfolio would comprise a wide array of genres and languages with 75 channels. Its combined revenue of INR133b (FY21) would include network/revenue market share of 27%/37%, with an estimated 35% EBITDA margin in the linear business (INR50b). Unlike the West, India’s Broadcasting market is still seeing a rise in TV penetration at sub-70%, with the time spent watching TV still growing. Subsequently, the TV Ad market is expected to grow at early double digits. In the past, Zee has been consistently growing at 1.2-1.5x of industry growth.

Combined entity can capitalize on large-scale digital opportunity

The OTT Entertainment market has grown to nearly INR100b, with INR43.5b in subscription revenue derived from 53m subscriptions/29m unique subscriptions. The Zee and Sony OTT apps, while performing modestly individually, have doubledigit revenue/subscriber market share on a combined basis. The combined operating cost of ~INR30b is similar to that of the top OTT apps. Assuming the combined entity spends two-thirds (~INR20b) on content, it could match the top entertainment apps in the Original Content Generation space. Individually, Zee lacked the strength to compete with the top OTT apps; the combined entity has the potential to create a strong foothold and content slate with a) a war chest of INR113b (capital infusion from Sony post-merger) and b) potential cash generation of INR50b from the linear business. The only missing piece is sports, where the entity has taken Cricket World Cup TV broadcasting rights for FY24-27.

Valuation and view

The stock, on a combined basis holds an EV of INR306.4b, and trades at merely 7x EV/EBITDA for the normalized linear biz, assuming zero value for the OTT business. The concerns on merger going through have been playing on the stock price, as is evident from its low valuation. But now, the merger process closer to completion, the stock should benefit. We see the potential for value accretion on both the linear and OTT businesses, given the high ROCE and growing linear business and strong wherewithal in the OTT business. With the change in the board and the majority stake now being owned by Sony, an MNC, the stock should also benefit from a) better capital allocation, b) improved corporate governance, and c) business synergies. We reiterate our Buy rating with TP of INR310.

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