Mumbai: The National Company Law Tribunal’s (NCLT) approval for the Zee Entertainment (Z IN)-Sony merger without conditions offers further respite for Z valuation, which has been muted for the past two years (the stock has not given any absolute returns). The company will now move to Registrar of Companies to file for the merged entity once the final NCLT

order is released; in the interim, we await the outcome of the SEBI and SAT cases against the Goenka family, the promoter, which may not have any adverse impact on the merger, as Punit Goenka has already stepped down from the board; in a worst case scenario, the board and shareholders will appoint a new CEO in case SAT order is against Punit Goenka. Post the

regulatory approvals, Z will be delisted, and the merged company will be relisted as Sony-Zee wherein 100 shares of Z will enable shareholders to get 85 shares of the merged entity (two-three months process). We do not expect any change in the deal contours despite the long delay, as NCLT has approved the scheme. Further, Sony will get a majority shareholding

of 50.8 per cent in the merged entity whereas the Goenka family’s stake will move up to 3.99 per cent, which includes the non-compete fee. We do not expect any impact from creditors filing a case against the NCLAT order.

Moat remains for the merged company

Z-Sony commands an ad market share of 24 per cent as on CY22, below the other large peer, Star-Disney, which is at 33 per cent; formation of a large entity on the broadcasting side would lead to cost and revenue synergy, which would offset the negative impact of lower growth rates (India TV ad revenue CAGR has been flat over FY20-23).

Valuation: reiterate buy with a higher TP of Rs 340

We expect better execution in terms of strategic initiatives, due to global expertise and better CG (corporate governance) initiatives, which should propel higher cashflow. We do not expect Z-Sony valuation moving to 32- 33 times fwd. P/E (peak valuation multiple in FY18). This is because India’s media landscape has changed with 1) TV broadcasting growth rates

converging, and 2) digital business offering limited opportunity for monetization & scale due to disruption; however, we expect the negative impact to be offset by: 1) the merged company, and 2) an MNC-backed firm, which would lead to P/E at a 40 per cent discount vs peak (32x one-year forward). We introduce FY26E for the merged entity and value the core broadcasting business at 20x (from 17x) one-year forward P/E (potential exit of Disney from linear TV may enable Z-Sony to gain market share). We roll over to 24 Sept(since synergies will take some time to kick in) SOTP based TP of Rs 340 from Rs 300 (after factoring in higher sports losses), with a cash infusion from Sony, synergy and valuing the OTT business four times one year. fwd. EV/Sales; our PAT estimate incorporates potential OTT losses.

Disruption defining merged company valuation

India’s OTT landscape has seen a disruption post Jio Cinema offering OTT content free of cost, which has led to other platforms reducing average revenue per user (ARPU) or offering content free; unit economics are already not in favour of OTT, and free content offering will further delay the path to profitability for OTT firms.

Further, Z also has bought TV rights of the ICC tournaments from Star-Disney, which too will see lower revenue than our expectations, (refer to our note, Sports play attractive in medium term, on 16 September 2022) we have cut our sports revenue estimates by 15-20 per cent, on the back of a volatile ad. environment on TV in the near term. Another big factor, which remains favourable for ZSony, is the potential exit of Disney from the TV landscape; in case of a strategic partner or an exit by Disney-Star from India’s TV business, Z-Sony may find it easier to displace the former to achieve the number one position in the TV broadcasting space.

Merged OTT platform leading to better ARPU

Both OTT platforms coming together would help the merged company gain further market share in the digital segment too, as it has a variety of catalogue with little overlap on digital content, just as in TV. The OTT business is all about scale and a merged OTT platform would lead to better ARPU/ad-led revenue growth coupled with an improved distribution mechanism & revenue too; it also can lead to efficiency on cost, which, in turn, could reduce losses. The merged company also will look to enhance its offerings in the sports (cricket) segment, which is the fastest-growing genre, both on TV and digital, helped by increased consumption patterns.