Why Is $10 Billion Merger Deal With Sony Crucial For Zee Entertainment?

A lot is going on in regard to the long-pending Zee-Sony merger this week. Question of when will the two media giants finally complete their proposed $10 billion deal. However, the latest reports have been jarring with Zee claiming that the deal is very much alive between them and Sony, while reports stating that Japan-based Sony Group most likely will continue merger talks till January 20th. Sony is yet to confirm any buzz that has taken limelight recently. But one question remains, how crucial is this deal in the media sector and most importantly for both of them especially Zee?

At first, it was the report that Sony had most likely cancelled the merger talks with Zee due to suitors not liking Zee's current MD Punit Goenka being the new CEO of the merged entity. This was shunned by Zee on January 9th when the company called the report "baseless and factually incorrect" and confirmed that the merger talks with Sony continue and that they are working towards successful closure of the deal.

The man at the heart of this buzz, Goenka is currently under investigation for siphoning off money from Zee Entertainment and other companies under the Essel Group.

But then as of the latest, another report on January 10th claimed that Sony will continue merger talks with Zee till January 20th. If this is the case, then there are only 10 days remaining to finally have an outcome on the Sony-Zee merger, a deal that was first struck in December 2021.

Amidst all of this, ZEEL's share price went from falling by 14% on January 9th to ending at Rs 259.60 apiece up by 1.31% on BSE after market hours of January 10th.

The two parties came into an agreement in December 2021, where ZEEL will merge into SPNI and combine their linear networks, digital assets, production operations and program libraries. Post the deal, SPE will indirectly hold a majority of 50.86% of the combined company, the promoters (founders) of ZEEL will hold 3.99%, and the other ZEEL shareholders will hold a 45.15% stake.

So how important is the merger deal for Sony and Zee?

As per the research report of Emkay Global, the potentially merged Sony-Zee entity would have been a formidable competitor to the Reliance-Disney association, given that it has fared better than the latter on most parameters. However, the standalone entities can be vulnerable to competition from the significantly larger entity (if the Reliance-Disney merger gets consummated).

It further added Zee's advertising revenue growth has been sluggish (-8% in FY23, -3.5% in H1FY24), despite FMCG companies ramping up their spending.

This can be attributed to i) the shrinking share of television advertising vis-à-vis digital and ii) sports advertising gaining at the cost of GECs. The standalone entities also risk the foregoing synergies; we had estimated 4% revenue synergies (of the total revenue) accruing from better bargaining power with content producers, distributors, and advertisers along with some cost rationalization, as per the report.

Furthermore, Emkay believes the investment will also potentially take a hit. The brokerage explained that to plug the gap on the sports side, Zee signed an agreement with Disney Star on August 22 to purchase television broadcasting rights for the ICC Men's Cricket and U-19 events for four years (2024-27).

As per Emkay's calculation, Zee would have to pay Rs110-120bn over the tenure of this deal. However, with the merger possibly not going through, the brokerage believes this deal will be in jeopardy as such a large payment will not be justified on a standalone basis. Zee5 has also seen its losses widen due to upfront fixed costs and has been unable to reverse its losses yet.

With a focus on profitability, growth can potentially suffer. SonyLiv on its part has managed to scale its SVOD base better (33.3mn as per the latest estimates in May 23). However, it has been unable to achieve leadership on the linear TV side, it said.

Lastly, in Emkay's view, the failure of the merger could force both companies to have a complete relook at their strategies, potentially squandering a time of more than two years. The stock has traded at a valuation of ~17x its one-year fwd. EV/EBITDA over the last 10 years (our valuation adjusts for OTT losses); it has de-rated over the last couple of years but can see significant further de-rating if the merger does not consummate.

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