Shares of ZEE Entertainment Enterprises Ltd (ZEE) took a beating on Tuesday morning, hitting a lower circuit of 10 per cent, as Sony India terminated merger deal, following which bunch of brokerages suggested 'Sell' on stock, with price targets suggesting up to up to 50 per cent. Shares of ZEE fell 10 per cent to Rs 208.60 on BSE, with a few now anticipating shareholder activism against the ZEE management in coming days.
Analysts said that corporate governance at ZEE was a focus point earlier due to promoter share pledging crisis in 2019 and drop in business cash conversion. "The Zee-Sony merger would have addressed ZEE's low promoter ownership challenge," they said.
Also read: ZEE-Sony merger: 6 likely reasons for the deal falling through
Motilal Oswal said it does not expect a recovery in earnings in the near term. ZEE, it said, has not stated whether it will pursue the merger while the litigation with Sony could hinder improvements in operations or explore a merger with other players. Reports indicate that Disney is exploring a potential India exit, while a deal with RIL was also explored earlier.
Nuvama said the potential reasons for the deal termination was a change in industry dynamics with a likely deal between Viacom and Disney Star and also a gap in decision-making in Sony’s US and Japan offices.
"It is unclear what path ZEE may take going ahead and there is limited clarity on the long-term outlook of the business," Motilal Oswal said.
"With Zee-Sony merger being terminated, we believe Zee’s PE will slump back to 12x levels, seen prior to the Sony merger announcement (August 21). This was also the period of Covid-19 second wave, while Zee’s stock PE had also de-rated in the past during the promoter share pledging crisis (in 2019) and the fall in business cash conversion. We believe Zee’s valuation is likely to de-rate back to 12x PE on which we base our revised target of Rs 198," CLSA said.
Emkay Global said the termination should result in a legal tussle between the two embroiled companies, as implied in their press release. It also believes the termination could spur shareholder activism against the ZEE management.
"Further, we reckon that Zee will now draw other suitors for potential deals. Currently, we downgrade the stock to SELL (from Buy) due to weak competitive positioning and escalated corporate governance issues," it said.
Also read: ZEE shares at Rs 130? Stock sees 'Sell' recommendations, PE derating on Sony merger termination
(More to come)