Zee horror show: Stock slumps over 32% after merger with Sony is called off

• Culver Max Entertainment, terminated the two-year deal with Zee Entertainment on Monday.
• Sony is also seeking a $90 million termination fee from Zee, while the latter is refuting it and evaluating legal options.
• Analysts downgraded the Zee stock as merger possibility was driving it for the last two years.

The stock of Zee Entertainment Enterprises slumped by 32.7% on Tuesday, a day after Sony called off a merger deal with it. It was one of the top losers on Bombay Stock Exchange for the day.

The bourses revised the lower circuit limit for the company to 35%. The stock closed at ₹155.9 per share by the end of the trading session.

Culver Max Entertainment, formerly known as Sony Pictures Networks India, terminated the two-year deal with Zee Entertainment (ZEEL) of a possible merger on Monday. The merger could have created a $10 billion behemoth.

Sony is also seeking a $90 million termination fee, which has led analysts to quickly downgrade the stock. “Merger with Sony was the key valuation driver to move up in the past two years. But given the termination, we downgrade Zee to ‘sell’,” says a report by Elara Capital.

Troubles ahead?

With the merger prospects gone, ZEEL valuation will slump back to its 2021 days, and brings back a lot of its earlier troubles to the fore. As per a CNBC TV18 report, a probe by market regulator SEBI might spell even more trouble for the company. As per the SEBI report, Puneet Goenka, the CEO of the company might have siphoned as much as ₹800 crore from the company, as compared to the earlier reported figure of ₹200 crore.

Added to that, analysts have also flagged off many issues around the company – both operational and governance-wise. In 2019, the company went through a promoter pledging crisis. After which, Zee promoters repaid loans with multiple stake sales that brought down its promoter shareholding from 42% to a mere 4%.

Its earnings performance too has been dismal over the last two years. “Since the announcement of the merger, Zee’s profitability has eroded due to weak industry dynamics. For instance, on an absolute basis, Zee’s PAT slid around 48% over FY21–23,” said a report by CLSA.

Ashwin Patil, Senior research analyst at LKP Securities expects more pain in the stock. "Zee is operationally facing a lot many challenges in the form of subdued advertising business, depleting viewership share in its key markets like Hindi GEC, Tamil and Marathi markets. The stock is seeing a free fall today and may see some buying post we see a further fall in it," he said.

Zee, like most of its peers, might also face heavy competition from yet another mega media deal that’s in progress as per media reports. The Disney Hotstar merger with Reliance’s Viacom will threaten most players in the industry.

“Meanwhile, Reliance’s Viacom and Disney+Hotstar deal shall get wrapped up soon. Both the entities together hold major cricket broadcasting rights such as IPL, ICC and other Indian bilateral cricket series. In our view, for Zee to be a serious player in sports and to scale up its OTT, it would need a financial partner,” said Nuvama Institutional Equities.