Thumbs up to Zee-Sony deal: Elara Capital
With the two media powerhouses planning to merge, there could be fewer overlaps and more synergies, according to Elara Capital SVP Karan Taurani
The day broke with news of a ZEE-Sony merger in the offing. Managing director and chief executive officer of Zee Entertainment Enterprises Punit Goenka has signed a non-binding term sheet for the merger of ZEE with Sony Pictures Network. Karan Taurani, Senior Vice President - Research Analyst (Media, Consumer Discretionary & Internet) at Elara Capital, analyses how the merger, prima facie, could have a slew of positives in store for Zee.
1) Less overlap; more synergies - There is a big opportunity in terms of synergies as Sony is doing well in sports, mainstream GEC whereas zee has a strong recall on regional genre, which is less or absent for Sony; both have a very strong movie catalogue which can be used for OTT and Tv offering
2) OTT content strategy - Both companies can go to market together with their Merged OTT offerings, which too are slightly different in content, Sony is more into sports and mainstream shows (Scam), whereas Zee is into regional web series and hence the content strategy can augur well to create a platform, which has all of the offerings - they may emerge the second-largest homegrown OTT after Disney+ in India
3) OTT distribution strategy - Given the scale and depth of content, the combined entity will have better bargaining power with the distributors - OEM, telcos and other platforms, that too will be a win-win rather than them going to market separately
4) Advertising synergies - Zee has fared better vs industry avgs on ad growth front due to their strong execution around ad. strategy; both entities together will have a better reach towards a larger number of advertisers
5) Consolidation is a big positive - In times wherein growth rates in the tv industry - ad and subs revenue has converged due to shift to digital and uncertainty towards NTO 2.0, consolidation is a big respite in itself as it will lead to both players capitalising on each other strengths and compete with the market leader - Disney
6) Corporate governance overhang to fade away - With SPN having the controlling stake, the overhang on corporate Governance will fade away and this will also enable multiple re-rating for the company. In terms of management, Punit has the best capabilities to run the broadcasting business. They will need to reinvent their digital offerings over a period of time to drive further re-rating.
As per our initial estimates, Sony is estimated to grow at a lower CAGR of 10% (F20-24) on PAT which translates into INR 1,460cr whereas our estimate on Zee is INR 1676cr for FY24 (CAGR of 20%); the combined entity could have a PAT of around INR 3100cr- we expect the PE multiples to be in the range of 16x-17x ; execution on the digital business will drive further re-rating, however even on these valuations - there is a possibility of a 80-100% upside at least (market cap of INR 50000cr)
We will monitor more developments in the coming months; this looks like a structural re-rating candidate in India broadcasting space
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