Following the cancellation of its long-planned $10 billion merger with Sony Pictures on Monday, several brokerages downgraded shares of Zee Entertainment. The deal had been in the works for more than two years. Sony has also requested a termination fee of over $90 million.

Zee’s stock had already experienced a double depreciation in 2019 amid the promoter pledge controversy.

Following the declaration of the 2021 merger with Sony, the shares have not been able to return to the closing price of December 21, 2021, the day before the announcement of the merger.

Zee was downgraded from “Buy” to “Sell” by brokerage firm CLSA. Additionally, it cut its price goal from ₹300 to ₹198. According to CLSA, Zee’s valuation will drop from the merger projection of 18 times to levels of 12 times price-to-earnings in August 2021.

The note stated that with Sony holding 51% of the company, “Zee’s corporate governance has been in focus more so since the unprecedented promoter share pledging crisis of 2019,” in which the company’s promoter repaid loans with multiple stake sales, causing the promoter shareholding to fall to 4% from 42% earlier.

The firm also anticipates more rivalry in the industry due to the Reliance Industries and Disney Star merger.

In addition, Zee Entertainment was downgraded by Citi to “Sell” due to non-operational concerns and the cancellation of the merger.

As rising competition intensity takes the stage, the brokerage has lowered its price objective for the company to ₹180 from ₹340 previously and decreased its profits expectations for the fiscal year 2024–2026 by 22% and 38%, respectively.

Elara Capital, a brokerage, has cut its price objective for Zee’s shares by half, from 340 to 170, indicating that it too believes that Zee’s valuations would sharply decline.

Elara anticipates that Zee’s broadcasting business’s valuation will drop to at least ten times its current value in the next year or even less because of the following factors:

• Sharply converging linear TV growth;

• Potentially limited ability to grow the OTT business in a highly fragmented market;

• Lower profitability; and any additional inventory write-offs or related-party credit issues.

Elara anticipates that if the Reliance-Disney combination proceeds as planned, the aim will drop even lower to ₹130 due to increased competition.

“Possibility of any other strategic/financial partner buying out a majority stake in Zee could provide respite to the valuation multiple,” the paper stated.

Dolat Capital, which now anticipates a major de-rating of multiples following the current developments, stated that the merger was inevitable and a key re-rating trigger against the backdrop of Zee Entertainment’s subpar governance, earnings, and cash flows.

Additionally, Zed has been downgraded by the brokerage to “Sell” with a lowered price objective of 195, down from 320.

The memo stated, “With weak promoter holding, lack of faith, a higher cut in multiples is advisable,” but it also mentioned the possibility of prompt action by the non-promoters, such as a change in the board or management or the pursuit of an alternative M&A strategy.

“A hostile takeover or a white knight is also plausible,” Dolat Capital noted in its note.

Of the twenty-three analysts that follow Zee Entertainment, ten still rate the company as “buy,” four now recommend “hold,” and nine now have a “sell” rating.

For today’s session, Zee Entertainment’s shares are prohibited from trading, meaning that no new positions may be opened on the stock.

SOURCE: https://www.cnbctv18.com/market/zee-entertainment-share-price-merger-with-sony-called-off-multiple-downgrades-target-cut-valuation-18864771.htm