Zee-Sony Merger Deal : What’s beyond the hype?

Zee Entertainment Ltd has been making headlines for the past two weeks for good reasons. Hardly had its share price been locked in the 5% upper circuit the previous week, then it made a fresh 52-week high and again hit the 20% upper circuit this week!

But no, this wasn’t the first instance that it was in the limelight. A day before the management change was announced, Rakesh Jhunjhunwala’s Rare Enterprises had bought 5 million shares of the company at INR 220.4 per share. BofA securities Europe was another investor to buy 4.86 million shares around the same time. The stock moved up more than 40% on the following day (and further in the next days). Flexing hard, much? Just saying ;-)

On the other hand, two of its largest shareholders with a 17.88% stake in the broadcasting company, Invesco Developing Markets fund & OFI China Fund, sought to remove existing board members, including CEO Punit Goenka, while appointing new independent directors.

All in all, the stock has been on an upward journey for many days due to the obvious reasons stated above. Moving from 186 to 362, the stock has given a return of roughly  95% in just ten days!

(source: ZEEL Ticker)

We wonder how justified the price rally is, and where did all of this begin in the first place? Well, let’s go from the start.

The Inception of Zeel’s Saga

The story dates back to a while ago, when Essel Group was on the verge of losing control over Zee Entertainment Ltd (ZEEL), back in 2019. If you aren’t aware, the Essel Group-owned Zeel’s majority stake for a long time until it had to face its doomsday. Whoops!

It was a time when the group’s massive investment in the infra sector backfired, leaving them with unpaid loans of billions, which were taken with Zee’s shares as collateral. To add to their misery dump, Zee’s shares started falling, and it was a double-whammy for Essel! They had no other option but to sell off those shares to clear the loans. And Invesco came to their rescue.

Yes, they sold their shares to Invesco and managed to pay off the loans. But then, Invesco became the majority shareholder. Essel Group still continued to run Zeel. However, time and again, tax and corporate governance issues started emerging. Naturally, investors weren’t too happy about that. Sob sob.

So now you know why they ousted the board members, right? Well, that was obviously good news for the markets. Resultantly, there was a stock rally. So, now you know!

This week, Zeel made a fresh 52-week high, surging nearly 40% following its upcoming growth prospects of a win-win deal between Zee Entertainment & Sony Pictures Network India. The latest news of the merger has only made the technicals stronger even though the conclusion could take 6 to 8 months.

Be it social media or news channels, the deal is already rife, and most probably, you are aware of this. If you aren’t, here’s a snippet.

What’s in the Zee-Sony Merger deal?

A non-binding term sheet with Sony Pictures Network India (SPNI) has been approved by the Zee Entertainment Ltd (ZEEL) board to merge their operations. Sony will invest $1.57 billion (INR 11000 crore) in the merged entity as growth capital. Thus, the initial shareholding percentage of ZEEL will be roughly 47%, while 53% will be that of SONY.

Punit Goenka will become the CEO & MD of the combined entity after the necessary approvals from the committee. On the other hand, Subash Chandra (who founded the ZEE network) & his family will hold a total of 4% in the merged establishment with the option to raise the stake up to 20%, even though the takeover codes formulated by SEBI do not allow such discrimination between promoters & the public.

As far as the valuation is concerned, both the entities will take care of it independently. Like one would expect these days, the market has discounted the news pretty well, even when only a non-binding term sheet has been released. Well, there’s more to it, folks! But, Before diving in, here is some insight about the conglomerates.

SPN India, which Includes channels like Set Max, SAB, PIX, BBC Earth, Sony Ten & more and its OTT platform Sony Liv, is a wholly-owned subsidiary of Sony Corporation, Japan. While ZEE has been the entertainment go-to for Indians for ages with its incumbent household channels like ZEE TV, &tv, Big Magic, ZEE Anmol, ZEE Cinema, ZEE5 & more.

Coming to the point, what value will the merger create? Let’s understand.

Will the Merger create value for Zeel & Sony?

Let’s hear it from Zee’s Chairman himself: “ZEEL continues to chart a strong growth trajectory and the Board firmly believes that this merger will further benefit ZEEL. The value of the merged entity and the immense synergies drawn between both the conglomerates will not only boost business growth but will also enable shareholders to benefit from its future successes.” In short, 'all is well' for the shareholders.

The merged entity is expected to take over 75 Tv channels along with OTT platforms like ZEE5 & Sony LIV followed by Zee Studios, Sony Pictures India, and Studio NXT. That’s expected to make it India’s biggest network in the Entertainment space.

Synergies of the Deal

Here are the synergies that the deal is expected to provide:

• Broadcast Enrichment

On one hand, Sony is popular in General Entertainment Channels (GEC) and has rights to telecast live sports events like WWE & Cricket. At the same time, ZEE has a better market share in the movie segment with roughly 4800 movie titles spread across different languages. Combined entities are expected to strengthen the cinema, reality shows, OTT & Sports verticals. Magnanimous, indeed! 

• Global Grid

ZEE & Sony have a presence in over 173 & 167 countries, respectively, with billions of viewers. The combined entity will benefit a lot from this deal.

• India’s Largest Entertainment Network

Independently Sony has a viewership of 10-12% while ZEE of 17%. Thus, the new structure will hold a combined viewership of 27-29%. With the increased viewership, the merged entity is also assumed to increase the profitability and market share. Reportedly, the collaborated entertainment giant can generate a turnover of around Rs 15,000 crores.

• Transparent Corporate Governance

It looked as if the corporate governance had been compromised for Zee Entertainment Enterprise Ltd when top management, including Punit Goenka, was called for a reshuffle earlier this month. Now, analysts believe the merger will give a chance to do good the bad corporate governance practices.

• Competitive Advantage

Apart from the increased market share, the merger will showcase its strength in GEC as well as in the OTT space, posing tough competition to its rivals like Disney, Netflix & Star India.

• Stock Rally

ZEEL already rallied nearly 40% in the trading session when the news was announced, depicting a positive outlook. If the deal materializes, there could be further upside potential.

The Bottom Line

Zeel’s story could aptly be framed into a Bollywood drama. No, seriously! A happy start, some messy events, tragic incidents, betrayal, revenge, and finally, the resolution! Add a few many songs, and you have a box-office hit!

Zeel seems to have quite practically proven that there’s always ‘light at the end of the tunnel’. The upcoming deal will definitely help it expand its reach in Indian markets. But the magnitude is for time to tell!

So what do you say? Is this deal a match made in heaven? Tell us in the comments below.