Zee Entertainment Shares Slump 10%
Zee Entertainment Enterprises suffered a significant blow, with its stock plunging by 10% in the opening trade on January 23, following the unexpected termination of its $10-billion merger with Sony Pictures. The decline came after Sony cited delays in closing the deal by the specified end date and lapses in meeting the closing conditions of the agreement.
The National Stock Exchange witnessed Zee’s stock locked in a lower circuit at Rs 208.30 at 9:19 am. Seeking a termination fee of $90 million, Sony Pictures claimed breaches of the Merger Co-operation Agreement (MCA), a claim vehemently denied by Zee Entertainment.
In the wake of the collapsed merger, several prominent brokerages, including Citi, CLSA, and Motilal Oswal Financial Services, downgraded Zee Entertainment, projecting a slump in valuations and an increase in competitive intensity within the sector.
UBS Securities expressed a pessimistic outlook, viewing the cancellation of the merger as a negative development for Zee. The brokerage anticipates a 20% drop in the implied value per share, currently at Rs 190. This downgrade is fueled by concerns about Zee’s valuation and its ability to weather the challenges arising from the terminated merger.
CLSA shares this negative sentiment, forecasting a drop in valuation from 18x to 12x after the merger termination. The brokerage also points out the additional pressure on Zee’s stock due to its low promoter ownership. Consequently, CLSA downgraded the stock from “buy” to “sell” and reduced the price target by 34% to Rs 198.
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Citi, too, has adopted a bearish stance, downgrading Zee Entertainment’s stock to “sell” and slashing the price target by nearly half to Rs 180. The downgrade reflects concerns about Zee’s ability to navigate the increased competitive landscape in the media sector, particularly in light of the anticipated Reliance-Disney merger.
Motilal Oswal Financial Services joined the ranks of downgrades by revising its rating for Zee Entertainment downwards to “neutral” from “buy.” The brokerage sets a price target of Rs 200, citing uncertainties about Zee’s future path. The note emphasizes the lack of clarity on whether Zee will pursue an alternative merger or explore collaboration with other players.
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In a broader context, the termination of the Sony merger has opened the door to heightened competitive pressure for Zee Entertainment. The expected Reliance-Disney merger is poised to further intensify competition within the media sector. Additionally, the brokerages have collectively revised down their earnings estimates for Zee by 22-38% for FY24-26, assuming a slower margin recovery.
As the dust settles from the collapsed merger, Zee Entertainment finds itself at a crossroads, facing challenges from both a valuation standpoint and the evolving dynamics of the media industry. The downgrades from reputable brokerages underscore the uncertainties and headwinds that Zee may encounter in the foreseeable future.
