Table of Contents
BRIEF SUMMARY OF MOTILAL OSWAL RESEARCH REPORT ON ZEE ENTERTAINMENT SHARE
There is an announcement of completion of the deal from ZEE entertainment share.
The promoters of SONY and ZEE entertainment share will hold 51%/4% as per the deal, while the remaining % would be allocated to the public.
Sony would be investing ₹ 113 bn (USD 1.6 bn).
The merging of the entity would result in an estimated business of 11-12x EV/EBITDA, with a downfall in OTT business.
In the broadcasting space, the combined entity will be a leader.
Balance sheet issues are addressed by this deal.
In the Indian Media space, Sony like company will definitely have an ability to leverage the large-scale opportunities.
Motilal Oswal upgrades ZEE entertainment share to BUY rating with a revised target price of ₹ 425.
Key risks could be the roadblocks in the merger deal.
FUND INFUSION
Sony Pictures Networks India Private Ltd through rights issue of ₹ 79.5 bn and Zee promoters through a new share issue of ₹ 11 bn, collected a ₹ 90.5 bn in the combined entity.
The inclusion of the above-mentioned amount and the existing cash on the books of this merged entity will form USD 1.575 bn (₹ 113.4 bn).
There is an agreement from ZEE entertainment share to limit its stake to 20% in the merged entity.
There is a clarification from the press release that the deal does not give the liberty to the promoters of ZEE entertainment share for acquiring any equity from Sony in this combined entity.
This was a key bugbear for Invesco.
Sony with the help of its subsidiaries will indirectly hold a majority stake of 50.86% while ZEE will have 3.99% stake in the combined entity.
Pubic would have 45.15% shareholding will ZEE promoters will have 3.99%.
This would be achieved on the following basis:
a) A bonus issue to Sony Pictures Networks India Private Ltd shareholders with a 10:1 stock split.
b) By both the companies there will an equity infusion of ₹ 90.5 bn.
c) ZEE shareholders would swap shares of 85:100 while BEPL’s shareholders will be engaged in 133:10.
Share swap of 85:100 for ZEE’s shareholders and 133:10 for BEPL’s shareholders.
There would be an implication of a post-money enterprise value of ₹ 523.6 bn for the merged entity as per ZEE’s current market capitalization.
Mr. Punit Goenka (MD and CEO of ZEE) will drive the leadership of the combined entity.
DEAL PROCESS
There will be a change in the regulatory and shareholder/creditor approvals which might be evident in the next 3-4 quarters.
Shareholders and creditor approval: ZEE needs to secure the consent of three-fourth of its shareholders for the deal to be passed.
Securing an approval from Invesco would be mandatory as they have 20% stake.
So, this deal could take some time. CCI’s approval should take lesser time.
What’s in it for each company’s stakeholders?
The merged entity will definitely have a good market standing due to ZEE’s superb balance sheet and market position.
The merged entity would have a revenue of around ₹ 140-150 bn.
There would be an increase in the portfolio which will include general entertainment, movies and sports.
Sony Pictures Networks India Private Ltd operates 26 channels which also contains sports entertainment, while 49 channels are under ZEE entertainment share.
To boost its competitive position, the company could use its leverage in the upcoming time.
As per Motilal Oswal, the combined entity would spend ₹ 30 bn annually on the OTT platform.
Sony will elect an independent board for the new entity.
Sony gets two things. a.) A business at a reasonable price. Currently ZEE entertainment share is valued below 20x.
b) To drive a better broadcasting business Sony develops a better management leadership.
Promoter: This will pave the path for addressing the corporate governance concerns for the promoters and also to improve their shareholding.
In the changing Media landscape, the combined entity would indulge themselves in new opportunities which would be possible due to their mutual support.
OTT opportunity and merged entity’s capabilities.
The same is doubling annually.
The overall video subscription market was valued ~INR43b in CY20.
The TV broadcasting market is expected to double in the next two years.
The ability of the combined entity to spend ₹ 30 bn annually is equivalent to Netflix’s ₹ 30 bn India content investment over the past 2 years.
As per Motilal Oswal Estimates, the combined MAU (Monthly active users) of SonyLiv and ZEE5 are around 140m while Hotstar has 192m.
VALUATION AND VIEW
Due to strong operational background the merged entity will receive a strong board under the leadership of Mr. Goenka.
The stock is still trading below 20x, including SPNI.
But the deal may take 3-4 quarters to fructify, given the long haul of structural changes to the business, board, and leadership, which may take time to drive incremental earnings.
Considering the stable state 35% EBITDA margin for the linear broadcasting business, the OTT business garners negative value.
Motilal Oswal upgrades their rating to Buy with a revised TP of INR425/share (at 25x Sep’23E EPS).
QUARTERLY RESULTS
Figures in Cr
| Quarterly Results | Sep-19 | Dec-19 | Mar-20 | Jun-20 | Sep-20 | Dec-20 | Mar-21 | Jun-21 | Sep-21 |
| Sales | 2,122 | 2,049 | 1,951 | 1,312 | 1,723 | 2,729 | 1,966 | 1,775 | 1,979 |
| Expenses | 1,439 | 1,523 | 2,517 | 1,204 | 1,430 | 2,098 | 1,404 | 1,441 | 1,575 |
| Operating Profit | 683 | 525 | -566 | 108 | 293 | 632 | 562 | 334 | 403 |
| OPM % | 32% | 26% | -29% | 8% | 17% | 23% | 29% | 19% | 20% |
| Other Income | -102 | 71 | -73 | 26 | -59 | 28 | -11 | 30 | 18 |
| Interest | 18 | 20 | 86 | 5 | 1 | 2 | 49 | 2 | 2 |
| Depreciation | 58 | 66 | 78 | 72 | 65 | 65 | 63 | 59 | 60 |
| Profit before tax | 504 | 511 | -803 | 58 | 167 | 592 | 439 | 303 | 359 |
| Tax % | 18% | 32% | 5% | 49% | 44% | 33% | 38% | 31% | 26% |
| Net Profit | 413 | 349 | -767 | 30 | 94 | 400 | 276 | 214 | 270 |
| EPS in Rs | 4.3 | 3.64 | -7.98 | 0.32 | 0.98 | 4.16 | 2.87 | 2.23 | 2.81 |
BALANCE SHEET
Figures in Cr
| Balance Sheet | Mar-15 | Mar-16 | Mar-17 | Mar-18 | Mar-19 | Mar-20 | Mar-21 | Sep-21 |
| Share Capital | 2,115 | 96 | 96 | 1,240 | 837 | 394 | 96 | 96 |
| Reserves | 3,435 | 4,708 | 6,594 | 7,466 | 8,828 | 9,248 | 9,998 | 10,254 |
| Borrowings | 2 | 1,716 | 2,203 | 382 | 374 | 352 | 505 | 459 |
| Other Liabilities | 3,473 | 1,446 | 1,364 | 3,186 | 3,636 | 2,722 | 2,219 | 2,149 |
| Total Liabilities | 7,006 | 7,966 | 10,258 | 11,130 | 12,933 | 12,418 | 12,819 | 12,958 |
| Fixed Assets | 1,138 | 1,333 | 916 | 1,476 | 1,414 | 1,315 | 1,191 | 1,207 |
| CWIP | 88 | 110 | 156 | 92 | 156 | 83 | 75 | 18 |
| Investments | 976 | 1,148 | 1,343 | 1,529 | 976 | 325 | 798 | 511 |
| Other Assets | 4,805 | 5,375 | 7,843 | 8,033 | 10,386 | 10,695 | 10,754 | 11,222 |
| Total Assets | 7,006 | 7,966 | 10,258 | 11,130 | 12,933 | 12,418 | 12,819 | 12,958 |
SHARE HOLDING
| Share Holding | Sep-19 | Dec-19 | Mar-20 | Jun-20 | Sep-20 | Dec-20 | Mar-21 | Jun-21 | Sep-21 |
| Promoters | 22.37 | 4.87 | 4.77 | 4.77 | 4.02 | 4.02 | 3.99 | 3.99 | 3.99 |
| FIIs | 48.69 | 67.38 | 68.27 | 67.32 | 66.24 | 65.76 | 64.15 | 57.46 | 57.18 |
| DIIs | 13.08 | 11.84 | 10.91 | 9.68 | 11.12 | 12.01 | 12.4 | 18.47 | 15.98 |
| Government | 0.15 | 0.15 | 0.15 | 0.15 | 0.15 | 0.15 | 0.15 | 0.15 | 0.15 |
| Public | 15.71 | 15.77 | 15.91 | 18.08 | 18.48 | 18.06 | 19.31 | 19.93 | 22.7 |
Disclaimer
This stock has been analyzed and recommended in the brokerage report of Motilal Oswal. Equity investing can cause a risk of financial losses. Due caution should be exercised by the Investors while dealing in equities. LearnTwoTrade as well as the author are not liable for any losses caused as a result of decisions based on the article.