Zee Entertainment’s shares (ZEE.NS) plummeted by up to 30% on Tuesday, marking their worst day ever. This came after the failed $10 billion merger between the Indian broadcaster and Sony’s local unit. The collapse of the two-year-long talks created uncertainty for Zee, which has already been experiencing a decline in profit, advertising revenues, and cash reserves. As a result, at least six brokerages have recommended that investors should sell Zee’s stock.
The merger could have helped Zee and Sony compete against the soon-to-be-united Indian media businesses of Disney (DIS.N) and billionaire Mukesh Ambani’s Reliance (RELI.NS), as well as streaming giants Netflix (NFLX.O) and Amazon (AMZN.O). However, a stalemate over who would lead the combined company put the merger in danger. While neither Sony nor Zee disclosed the exact reason for the deal’s collapse, the failed deal could spur shareholder activism against Zee’s management.
Zee’s troubles with scaling up the business may cause it to lose its No.2 position. The TV business has been declining at a fairly fast pace, and Zee’s fiscal 2023 ad revenue is still 22% below 2019 levels. Zee’s profit has dropped by 68% in the first six months of the current fiscal year, while its cash reserves have decreased by 40%.
The average rating of the 19 analysts covering Zee has dropped to “hold” from “buy,” while their overall median price target has fallen by 16% to 253 rupees, according to LSEG data. 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.
Brokerage Emkay Global believes Zee will attract other suitors following the failed deal, but said “going it alone” is a low-probability event. 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 drop from 18x currently to 12x levels when the merger was announced.
As of now, the stock is trading at 166.25 rupees, down 28% from its previous value. 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.