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Announces merger with SPNI…

About the stock: Zee Entertainment (Zee) is one of the largest listed media companies in India, which owns and operates a bouquet of 49 TV channels across 11 languages and also an OTT app Zee5.

* The company’s TV network share dropped to 17% in Q1FY22 vs. 18.9% in Q4FY21 due to lockdown disruption and weak performance in categories such as Hindi GEC, Tamil and Marathi.

Event

* Zee and Sony Pictures Networks India (SPNI) announced an exclusive, nonbinding term sheet to merge both companies. The merged entity will have 75 channels, two OTT platforms and ~25%+ TV viewership market share. The companies will have 90 days for due diligence with expected completion timeline of six to eight months, post statutory approvals

* The resultant merger ratio is expected be 47.07% of the merged entity to be held by Zee shareholder and 52.93% by SPNI. The company also said that indicative merger ratio would have been 61.25% in favour of Zee shareholders, albeit it changed with proposed infusion of growth capital by SPNI (such that SPNI’s cash balance is at ~US$1.575 bn at time of closing). This implies, combined entity was valued at | 50,207 crore.

* The Goenka’s (current Zee promoter) stake shall remain at 4% in the combined entity, will incremental 2% to be given by SPNI for non-compete. They will have right to take their stake up to 20% (mode not yet announced)

* Punit Goenka will remain as MD and CEO for five years. This, we believe, will keep the contention of shareholders’ activism likely in near term

What should investors do?

We expect the merger announcement and shareholders’ activism to be a battle in the near term, which could impact management focus on operations as well as lead to stock price volatility. The recovery in market share in Hindi GEC and Marathi/Tamil will be also key to overall market share recovery and rerating. We maintain our HOLD rating on the company.

Target Price and Valuation: We, however raise our target multiple to 20x vs. 12x earlier, to account for this new development. We value Zee at | 330/share.

Key triggers for future price performance:

* Outcome of shareholders’ activism and deal completion

* Overall viewership share improvement, which has dipped in recent times. Turnaround in some of the regional markets like Tamil/Marathi as well as Hindi GEC, where they have lost viewership market share recently

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