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ZEE-Sony – A strong force in the making

Emerging strong player in the broadcasting space

The proposed merger between Zee Entertainment Enterprises India (ZEE) and Sony Pictures Networks India (SONY), which was recently approved by the NCLT, is expected to create a dominant player in the media industry. A war chest of USD1.6b (capital infusion) and steady annual EBITDA generation capability of ~INR40-50b from the linear business should enable the company to compete within the high-growth digital segment and to fund its recent foray into the sports segment. Further, the company’s deep understanding of the Indian entertainment market, better bargaining power, and ability to produce a strong line-up of content should allow it to have a strong play within the OTT space. We believe the current valuations do not fully capture the combined entity’s potential growth catalysts. While there has been some stability in subscription revenue with the implementation of NTO 3.0, the persistent softness in the ad market and the company’s decisions on content investment would be the key factors to watch out for

Strong play within linear segment

The combined entity’s linear channel portfolio of 75 channels across languages and genres and revenue potential of ~INR148b (FY23) indicate a network/market share of 27%/37%, creating one of the largest TV broadcasting businesses and overtaking Star (ex-IPL), which has a 24% market share. 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. Zee, with its expanding portfolio and capability to consistently grow at 1.2-1.5x higher than the industry, has a strong potential to grow. Further, its acquisition of broadcasting rights for ICC events fills in the missing piece within its portfolio. The slow recovery in ad revenue (affected by inflation and macro pressures) is a key drag on profitability, which may take a couple of quarters to improve.

Combined entity has strength to capitalize on large-scale digital opportunity

The OTT entertainment market has crossed INR100b, with INR72b in subscription revenue derived from 99m subscribers. The OTT platforms of ZEE and SONY have garnered a revenue share of 15% despite their modest performance individually. The combined operating cost of ~INR30b is similar to that of the top OTT apps. Assuming the merged entity spends two-thirds of this cost (~INR20b) on content, it could match the top entertainment apps in original content generation. While the companies, individually, might have lacked the strength to compete in the highly investment-intensive OTT space, the merged entity could create a strong foothold and content slate, with a war chest of USD1.6b (post-merger capital infusion from SONY) and cash generation potential of INR40-50b from the linear business.

Valuation and view

* The combined entity’s market cap at the current price stands at INR460b. Adjusted for the cash infusion of USD1.6b, the EV of the combined entity would stand at INR330b. Assuming the merged entity’s revenue generating capability of INR183b with 19% blended margins, it implies EV/EBITDA of 9.4x on FY25E. This implies a negative value for the OTT segment. Excluding the losses in OTT, the linear TV segment derives implied EV/EBITDA of 6.6x on FY25E.

* We believe that the current valuations do not capture the growth opportunity available to the combined entity. The key factors to watch out for include the company’s decision on the appointment of the top management, its investment strategy for the sports segment, persistent losses in Zee5 and a recovery in ad revenue.

* We retain BUY on the stock with a TP of INR320, valuing the company at 7x EV/EBITDA for the linear business and 1x EV/sales for the OTT segment on FY25 estimates. It implies a 30x P/E multiple on FY25E for the standalone entity.

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