CLSA downgrades Zee to 'sell' as Sony calls off merger; expects valuation to slump

Sony cited delays in closing the agreement by end date and lapses in meeting the closing conditions to the merger as reasons behind calling off the deal.

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Global brokerage firm CLSA has downgraded Zee Entertainment to a 'sell' call from the earlier 'buy' following the termination of its $10 billion mega-merger with Sony Pictures Network.

"With Zee-Sony merger being terminated, we believe Zee’s PE will slump back to 12x levels, seen prior to the Sony merger announcement in August 2021," the firm stated.

Based on that, the brokerage also sharply slashed its price target for the stock by 34 percent to Rs 198. On January 20, shares of Zee Entertainment settled with a cut of 1.5 percent at Rs 234.10 on the NSE.

Zee has been notified by Sony to cease the merger and the latter is also pursuing a termination fee of $90 million, citing alleged breaches by the Indian media giant. Sony has gone to the extent of invoking arbitration against Zee.

However, Zee is refuting Sony's claims of breach and asserting that the company's CEO, Punit Goenka, was also willing to step down in the interest of the merger.

The cancellation of the much anticipated merger also brought back concerns over Zee's corporate governance back into the limelight, more so since the unprecedented promoter share pledging crisis of 2019 wherein the company's promoters (the Essel Group) repaid loans with multiple stake sales to investors.

Also Read | Zee refutes all claims by Sony, says evaluating options

Following the 2019 fiasco to save the company from going bankrupt, the  company's promoter shareholding tanked to 4 percent from the earlier 42 percent. Analysts at CLSA believe the Zee-Sony merger would have addressed Zee’s low promoter ownership challenge as post-merger Sony will have owned 51 percent of the combined entity.

Meanwhile, CLSA also pointed towards the intense competitive pressures likely to be faced by Zee which would act as another dampener for the stock. The firm anticipates competition in the media sector to likely intensify with reported merger of Reliance and Disney Star.

Also Read | Sony calls off $10-billion merger deal, Zee denies allegations

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.