Zee Shares Plunge 30% After Sony Ends $10bn Indian Merger

Zee Entertainment shares sank by over 30% on Tuesday – after a bailout by investors following the collapse of its $10-billion merger with Sony.

Investors may fear that the Indian broadcaster will struggle to survive in a highly competitive sector without its tie-up with Sony’s local unit.

At least six brokerages also said investors should sell Zee’s stock, according to LSEG data. Zee’s tumbles saw it lose over $800 million in market value, almost four time the entire market capitalisation of news broadcaster NDTV.

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Vivekanand Subbaraman, an analyst at brokerage Ambit Capital, said Zee’s troubles with scaling up the business could see it lose its No-2 position in India’s huge domestic market.

“The challenge that Zee is facing is that the TV business has been declining at a fairly fast pace – its fiscal 2023 ad revenue is still 22% below 2019 levels.”

Japan’s Sony Group scrapped plans on Monday for a $10-billion merger with Zee, with both sides set to challenge each other legally over failures to close a deal that was due to reshape country’s media landscape.

‘Stalemate’ over who would lead merged firm

The collapse of the deal intended to create a media powerhouse in content-hungry India creates more uncertainty for TV broadcaster Zee in particular at a time when competition is heating up.

Disney is now seeking to merge its Indian businesses with media assets of billionaire Mukesh Ambani’s Reliance to form one of India’s biggest entertainment empires.

Sony said in a statement certain “closing conditions” to the merger were not satisfied despite “good faith discussions” with Zee, and the companies were unable to agree upon an extension by their Jan. 21 deadline.

“After more than two years of negotiations, we are extremely disappointed … We remain committed to growing our presence in this vibrant and fast-growing market,” it added.

Zee told Indian stock exchanges Sony was seeking $90 million in termination fees for alleged breaches of the merger agreement and emergency interim relief by “invoking arbitration”. Zee said it refutes all claims made by Sony and would take appropriate legal action.

Although Sony or Zee did not elaborate on Monday what conditions were unfulfilled, a stalemate over who will lead the combined company had put the merger in danger.

Concern over CEO Goenka, as profit fell

Zee had proposed that CEO Punit Goenka take the helm, but Sony baulked after he became the subject of an investigation by India’s market regulator. Zee said on Monday, however, that Goenka had been “agreeable to step down in the interest of the merger”.

Last year, the Securities and Exchange Board of India barred Goenka from holding directorships at any listed company, accusing him of being involved in diverting Zee’s funds to the group’s other listed entities.

Goenka denied the allegations. An Indian tribunal lifted the ban on him in October but said he would have to cooperate with any investigation by the regulator.

Goenka, who was in India’s Ayodhya city to attend the grand opening of a Lord Ram temple, wrote on X that he sees the Sony deal collapse as “a sign from the Lord”, adding he would move forward by strengthening his company for his stakeholders.

But neither Japan’s Sony Group nor Zee said why the deal collapsed.

Meanwhile, Zee’s profit slid 68% in the first six months of the current fiscal year, while its cash reserves dropped 40%.

The stock is now down 35% since the merger was announced in September 2021 and has tumbled nearly 40% so far in 2024, with a chunk of those losses coming earlier this month on reports of the deal falling through.

The average rating of the 19 analysts covering Zee has dropped to “hold” from “buy,” while their overall median price target has tumbled 16% to 253 rupees, according to LSEG data.

The stock was last trading down 28% at 166.25 rupees. Only one analyst expects the stock to fall further, to 150 rupees, while the others expect it to trade between 170 rupees and 340 rupees in the medium to long term.

Brokerage Emkay Global said Zee “going it alone” is a low-probability event and believes it will attract other suitors. However, it cautioned the failed deal could spur shareholder activism against Zee’s management.

CLSA double-downgraded Zee to “sell” and slashed its target price by 34%, estimating the stock’s price-to-earnings ratio, a key valuation metric, will from 18x currently to the 12x-levels when the merger was announced.