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Zee Entertainment Faces Turbulent Times Amidst Legal Woes and Failed Merger

January 23, 2024
Zee Entertainment

In a recent report by Elara Securities, it has been highlighted that Zee Entertainment Enterprises may encounter significant setbacks in the wake of impending legal battles and the collapse of its merger with Sony. The media conglomerate is entangled in various legal proceedings, including disputes over non-compete fees with Sony and challenges from creditors like Axis Finance and IDBI Bank linked to the Essel Group.

The report particularly sheds light on Zee’s dishonoring of a contract with Disney, which could lead to severe financial repercussions. Zee had initially agreed with Disney for the sub-franchise of sports rights, specifically ICC tournaments on linear TV. Elara Securities estimates annual losses of Rs 15.2 billion in FY25E and beyond, attributing this to high content costs, diminished sports ad revenue, and the availability of cricket content on OTT platforms for free.

However, due to its ongoing merger discussions with Sony, Zee might be unable to fulfill its contractual obligations with Disney, as indicated by a meager cash balance of Rs 6 billion compared to a potential contractual obligation of Rs 40 billion per year.

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The report suggests that Zee could experience a sharp de-rating in the P/E valuation of its broadcasting business, potentially falling to at least 10x one year forward or even lower. The incomplete merger with Sony is considered a crucial factor, with the report highlighting that linear TV growth has significantly converged. Zee might face challenges in scaling up its OTT offerings in a highly fragmented market, leading to lower profitability and a potential EBITDA margin convergence of 14 percent, excluding sports-related losses.

Ashwin Patil, Senior Research Analyst at LKP Securities, stated that Sony’s decision to terminate the JV/merger/acquisition with Zee is attributed to various issues encompassing legal, leadership, and compliance matters that persisted for over two-and-a-half years. This termination has caused a sharp decline in Zee’s share prices, which were once held with optimism for the merger to position the consolidated entity as the largest media house in India.

Besides the failed merger, Zee is grappling with operational challenges, including a subdued advertising business, declining viewership share in key markets like Hindi GEC, Tamil, and Marathi, competitive pricing in the subscription business, and slow growth in the OTT sector, facing tough competition from major players.

As a result, Zee Entertainment is witnessing a significant downturn in its stock value, prompting analysts to anticipate potential buying activity following further declines. The unfolding legal battles and operational challenges paint a challenging picture for Zee’s immediate future in the media and entertainment industry.

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