Zee Entertainment Enterprises faced a severe setback on January 23, with its stock plummeting 30 percent by noon after encountering a series of extended lower circuits since the market opened. This sharp decline followed Japan’s Sony Pictures’ Indian arm scrapping its proposed $10-billion merger with the Indian media giant.
In the wake of the failed merger, several brokerages downgraded Zee’s stock, foreseeing a significant slump in its valuation. At noon, Zee was trading at Rs 164 on the National Stock Exchange, down 29 percent from its opening at the first lower circuit of Rs 208.3, reflecting a 10 percent drop from the previous close.
Sony Pictures cited delays in closing the deal by the specified end date and lapses in meeting closing conditions of the agreement as reasons for terminating the merger. The company is also seeking a termination fee of $90 million, alleging breaches of the Merger Co-operation Agreement (MCA). Zee Entertainment, however, has denied the claims, contesting the allegations of MCA terms breach and the demand for the termination fee.
UBS Securities expressed concern over the merger cancellation, predicting a 20 percent drop in Zee’s implied value per share from the current Rs 190. CLSA echoed a similar sentiment, anticipating a slump in valuation from 18x to 12x post-termination and downgrading the stock to “sell” from its previous “buy” status, with a revised price target of Rs 198.
Citi also downgraded Zee to “sell,” slashing its price target by nearly half to Rs 180. The expected Reliance-Disney merger and escalating competitive intensity in the media sector are anticipated to take center stage with the Sony merger off the table. Citi revised its FY24-26 earnings estimate for Zee by 22-38 percent, assuming slower margin recovery.
Motilal Oswal Financial Services joined the downgrading trend, shifting its rating for Zee to “neutral” from “buy,” with a price target of Rs 200. The uncertainty surrounding Zee’s future course of action, potential litigation with Sony, and limited clarity on the long-term business outlook contributed to the revised rating.
