The Zee-Sony merger has been in the making for too long a period. However just when it is about to cross the finish line, it appears the Zee promoters are playing a risky game of poker with Sony. Only a few months back, Zee promoter and CEO had stated that the merger would go through whether or not he is the CEO of the merged entity. But media reports now indicate that Sony is considering walking away from the deal due to apparent insistence by Punit Goenka that he should head the company as per the original terms of the deal. With an ongoing SEBI probe against Zee promoters, Sony is well justified in seeking change from the merger agreement as to who should head the company.

While this might be a reputational issue for Punit Goenka to accede to (given SEBI allegations are not proven), with just a four percent stake in the company, holding the rest of the stakeholders hostage is a case of the tail wagging the dog. The ideal way forward would be to negotiate in good faith and look for an amicable and legally acceptable solution on a different leader for the merged entity, without derailing the deal.

MEDIA MERGERS

Merger in the media industry today is not a preferable option, but an imperative. The structure of the industry is changing in the streaming world and scale is paramount to deal with the changing dynamics. Recent media reports of a likely merger between Reliance’s media business and Dinsey’s India business are a case in point. And to think of it, Disney’s India business itself is a combination of erstwhile Disney India and News Corp’s sprawling Star Network. 

Merger has been the mantra for global media corporations for many years now. Disney-News Corp, Time Warner – Discovery merger (now Warner Bros) are examples. Recent news reports also indicate that Warner Bros and Paramount are in discussions for a merger. Media entities trying to play it alone have been on a declining path. For example in the US, shares of smaller media company - AMC Networks, popular for distributing content like Breaking Bad and Mad Men, have lost 70 per cent in the last five years as compared to S&P 500 returning 83 per cent in the same period. The business model for small players is depleting wherever streaming is becoming the main source for delivering media content. The same trend is likely to play out in India as well.

In such a scenario, Zee needs Sony, and Sony needs Zee. It is as simple as that. There isn’t a suitable alternative merger option of equal scale for either company here (assuming a Reliance Media and Disney India merger goes ahead). So what should Zee investors do now as uncertainty looms over the merger?

Following an earlier 14 per cent plunge in the shares of Zee today on doubts over the deal, Zee shares recovered partially and closed down 8 per cent for the day. This followed Zee stating in a regulatory filing that it is committed to the merger and talks to close the deal are ongoing.

Existing investors of Zee can continue to hold the stock. If the merger does not go through, the stock can fall back to around ₹200 levels. However, with DIIs holding around 42 per cent and FIIs holding around 35 per cent in Zee, they may not tolerate an instance of tail wagging the dog too long and may swing into action and exert pressure.

Zee’s balance sheet appears fine for now with net cash in the books of around ₹500 crore at the end of September 2023. The industry dynamics are changing and profitability too will, if the merger does not go through. However, at present ZEE is trading at 21.5 times FY25 EPS (Bloomberg consensus), which is not expensive for a media company with streaming operations. So if chaos ensues in the event of the deal not going through, valuation support will emerge around ₹200 levels (16-17 times FY25 EPS). Investors holding the stock must be willing to look past short-term volatility.

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