Hours after Sony terminated the $10-billion merger deal with Zee Entertainment Enterprises Ltd, global brokerage firm CLSA on Monday downgraded the Zee stock to 'sell' and has cut the share price target to Rs 198 from Rs 300.
"With the merger terminated, Zee's valuation will likely decline to 12x PE levels (Aug-21) seen prior to the merger announcement. The stock had de-rated in the past during the promoter share pledging crisis (in 2019) and fall in business cash conversion. We downgrade Zee from BUY to SELL on a revised target price of Rs 198 (was Rs 300) based on 12x 1 year forward PE. Also, competition should intensify with the reported merger of Reliance and Disney Star.
"Zee's corporate governance has been in focus, more so since the unprecedented promoter share pledging crisis of 2019 wherein Zee promoters (the Essel Group) repaid loans with multiple stake sales to investors in Zee and promoter's shareholding came down from 42% to 4%. Zee-Sony merger would have addressed Zee's low promoter ownership challenge as post-merger Sony will have owned 51%," said CLSA in a note.
Sony Group Corp on Monday said it is calling off a $10-billion merger of its India unit with Zee Entertainment, following a stalemate over who will lead the merged entity.
The entertainment giant sent a termination notice to Zee on the deal, which was announced more than two years back, and is seeking $90 million as break-up fees for violating the terms of the merger pact and “invoking arbitration”.
In a stock exchange filing on the issue, Zee on its part denied all claims made by Sony and said it is exploring legal remedies. “Zee has displayed utmost commitment towards the merger by undertaking several permanent and irreversible steps, resulting in one time and recurring costs for Zee,” it said.
A standoff over leadership is said to be the reason for the deal being called off. Sony had resisted demand by Zee chief executive Punit Goenka, who was investigated by market regulator SEBI over fraud allegations, to stay on after the merger.
The deal was seen as crucial for both companies for survival in the world’s fastest-growing large economy.
The deal would have created an entertainment conglomerate with more than 70 Indian TV channels, popular Bollywood studios and an extensive film library to take on global powerhouses Netflix and Amazon.
On Saturday, Zee's scrip on BSE closed 1.5% lower at Rs 231.4.
With inputs from PTI