Zee stock gets a boost post CCI clearing mega merger deal with Sony

Though there are some near-term concerns on the business front, most analysts are positive

The news that the Competition Commission of India (CCI) has cleared the proposed merger of Zee Entertainment (Zee) with Bangla Entertainment Private Limited (BEPL) and Culver Max Entertainment Private Limited (CMEPL) (formerly Sony Pictures Networks India or SPNI) triggered a rise of 4.65 per cent in the Zee stock, which closed at Rs 279.95 on the BSE.

The merger should take no more than 12 months. Zee and SPNI will combine linear networks, digital assets, production and program libraries. A majority of the board will be nominated by the Sony Group though Puneet Goenka will lead the combined entity as managing director and chief executive officer. All this is subject to a close reading of the full CCI order, and assumes nothing challenging in the fine print though the exchange filing from Zee says there are “certain modifications” in the CCI order.

In the near-term, Zee results in Q2, 2022-23 may be weak since the weak rural demand scenario implies lower ad revenues from consumer-facing companies. However a rebound is expected in the second half which should mean better ad revenues. The merged entity will have roughly 90 channels and there could be a merger/divestment of a few channels with duplication.

TV ad-spend has grown at around the same rate as India’s nominal GDP growth (roughly 15-16 per cent this fiscal and 12 per cent CAGR over a 5-year period) while digital ad-spend is growing at 3x. But TV is seen as critical to brand building. Even e-commerce spends around 50 per cent of advertising budgets on TV.  

Subscription revenue is currently under a cloud for several reasons. The New Tariff Order (NTO 2) from the TRAI caps pricing per channel at Rs 12, a deep cut from the previous cap of Rs 19. This is being strenuously lobbied against by broadcasters, who have gone to court, so far unsuccessfully. The NTO 2 is supposed to be implemented by February-end 2023. After this, there could be clarity on subscriber revenue.

Apart from NTO 2, there has been rapid growth in OTT subscriptions, which affects the top-end of the market and there is DD Free Dish which removes lower end subscribers. But there are also an estimated 100 million non-TV-owning households so the market could expand. India has a low ARPU of $3-equivalent compared to First World economies (Singapore $31, US $76, etc.). TV ownership continues to grow, but slowly, with around 72 per cent of new TVs being smart. India is among the fastest growth markets for TV shipments at around 12 per cent CAGR.

Despite these long-term positives, both subscription revenues and ad revenues are below pre-pandemic levels for India. Zee has not had a good performance since Covid hit. It was struggling with old content and inventory. So consolidation is not surprising.

The balance sheet situation seems to have improved and there are signs of better governance with lower related-party receivables and no corporate guarantees. Further inventory write downs and amortisation may be needed. Zee has also re-entered the key sports market. The merger scheme mandates Sony to bring USD 1.5 billion cash into the merged-co which would considerably improve the merged entity’s position. The merger could help put Zee back on the growth path. Analysts have buy recommendations with one brokerage offering a target price of Rs 370.