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The future of Zee Entertainment is likely to see heightened uncertainty, after a division of Japanese tech giant Sony scrapped plans for a merger two years in the making. Shares of the Indian media house fell 34% on Tuesday, while investors shrugged off the impact on the $124 billion Japanese media and technology giant Sony. ZEEL-IN 1Y mountain What are analysts saying about Zee shares, moving forward? Citi The Wall Street investment bank said the termination of the merger was a “material negative” for Zee and downgraded the outlook on the business’ stock from buy to sell. “We expect the company’s valuation multiple to trend substantially lower given increased risks around non operational/promoter group issues, capital allocation, and incremental liabilities from the merger termination,” Citi said in a note to clients on Jan 22. “Rising competitive intensity (media reports suggest potential consolidation of Reliance and Disney Star India media businesses) would create further challenges for the business.” Citi sharply slashed its price target on Zee’s stock from 340 Indian rupees to 180 Indian rupees. Motilal Oswal Analysts at Indian investment broker Motilal Oswal said that Zee would find it “challenging” to continue to operate as an independent company while facing severe competitive pressures from Star-owner Disney, Netflix, Amazon Prime, and Reliance Industries-led Network18. Media reports have indicated that Disney could either opt to exit India with a sale of its Indian assets or explore a joint venture with Reliance Industries. “The company’s performance has been abysmal for the last four years as ad revenue declined 14% over FY20-23 due to weak market conditions and continued market share loss over the last 4-5 years, from over 20% to sub-17-18%,” said Motilal Oswal’s analysts led by Aliasgar Shakir, as they downgraded the stock from buy to neutral and set it a target price of 200 rupees. “We do not expect a recovery in earnings in the near term. Zee has not stated whether it will pursue the merger while the litigation with Sony could hinder improvements in operations or explore a merger with other players,” the analysts added. Elara Capital Analysts at Elara Capital suggest that Zee is severely cash-strapped with a cash balance of a mere 6 billion rupees, yet is under contractual obligation with Disney for sub-franchised sports rights worth 40 billion rupees a year. “We believe the above termination may hit both the parties as both are facing stiff competition from digital media as also potential threat from the merger of RIL-Disney, near term,” said Elara analysts led by Karan Taurani in a note to clients, as they downgraded the stock and set its target price at 170 rupees. Emkay Research Analyst Pulkit Chawla of Emkay told clients that Zee could become embroiled in a “long-drawn-out legal tussle” with investors. In 2021, after unsuccessfully brokering deal talks with Reliance, Zee’s then-largest shareholder, Invesco, called for an extraordinary general meeting to oust its chief executive Punit Goenka from the company’s board. Emkay sees rising odds of a similar reoccurrence in the future. “We believe this breakdown can also spur shareholder activism against Zee Management,” Chawla said in a note to clients. Ambit Insights Analysts at Ambit Insights said that the merger cancellation is a “lose-lose for both sides,” as the two companies had complementary pan-India presence. Without the deal, the analysts recommended investors should “brace for uncertainty” as the shares could trade in a “very volatile” manner. Potential bidders Ambit’s analysts noted that strategic investors such as Reliance and the Adani group may attempt to acquire shares, while it trades at distressed valuations publicly. Adani group has previously made inroads in the media sector by acquiring Quintillion Business Media, the Indian partner of Bloomberg News, along with the hostile takeover of news channel NDTV. Emkay suggests Zee’s market position also makes it an attractive target for other suitors with potential deals in mind. “Going forward, we believe Zee will attract other suitors for potential deals, with ‘going it alone’ being a low-probability event, in our view,” said the Emkay analyst. Similarly, Elara analysts added, “Possibility of any other strategic/financial partner buying majority stake in Zee could provide respite to valuation multiples.”
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