Zee-Sony merger appears set for a successful finale

The two entities, when merged, will form the largest media entertainment company in the country with leadership in almost every genre and language across India. The estimated revenues of the combined entity are expected to be around $2 billion, Goenka added.

SPN will be injecting $1.57 billion capital into the merged entity, which will enable it to compete with global giants in the OTT (Over The Top) space. At the same time, the entity will be able to invest in premium content, including sports.

“We just finished non-compete on sports with SPN and it’s coming full circle,” said Goenka, adding that the rising digital landscape has opened new opportunities in sports for monetisation.

Although ZEE has been late in embracing new technology, it will now catch up very quickly with global players.

The Indian SVOD (subscription video on demand) market is expected to grow to 200 million over the next five years. ZEE5 has 40-50 million subscribers and around 300 million monthly views.

Commenting on the synergies of the merger, Manoj Dalmia, Founder and Director, Proficient Equities Limited, said, “The entity will have a combined active user base of 112 million and will leverage Sony’s strength in segments like sports, entertainment channels and Zee’s foray into regional genres like the Tamil, Telugu and Punjabi languages”.

However, it remains to be seen how the two OTT platforms will be merged and how their content overlap will be tackled.

Also read: What does Zee-Sony deal mean for investors? Here's what experts have to say

Ad volumes/revenues to aid the new entity

“This development (merger) is taking place at a time when TV ad volumes were higher by 11% YoY and 23% on a two-year basis with 22% new advertisers,” said a report by Edelweiss.

Ad volumes were highest for the FMCG sector, while ecommerce and BFSI recorded growth of 97 percent and 98 percent, respectively, on a two-year basis (compared to October 2019), the brokerage added.

Broadcast Audience Research Council (BARC), a joint industry body of broadcasters, advertisers and advertising and media agencies, pegs the television ad volumes for October 2021 at 178 million seconds. This has been the highest ad volume achieved so far in 2021 in a single month, with YoY growth of 11 percent.

The agency added that a total of 2,851 advertisers (22 percent of them first-time advertisers) advertised for 4,624 brands during the month. The Dussehra week saw 13 percent growth in ad volumes over the previous four weeks while growth was about 25 percent compared to 2019.

The outlook

The opening up of the economy and revival of demand has imbibed confidence in FMCG, retail, banking and e-commerce players and they have started allocating higher budgets for media spends. The retail and personal accessories space saw an increase of 127 percent and 157 percent, respectively, in ad volumes compared to the levels at the start of January 2021.

With ad revenues on track for a fast recovery and a much stronger and wider content portfolio coming forth after the merger, the merged entity is all set to capture a major foothold and receive strong ad spends from industries as it will have a much wider reach, opined Edelweiss in its report, adding that the deal is a win-win for shareholders, minority shareholders and promoters.

As per its estimates, the stock is currently trading at a valuation of 21x / 16.5x of FY2022E/FY2023E earnings. It has put a ‘Buy’ recommendation on the stock with a target price of Rs 428/share in the coming 12 months.

Brokerage firm Sharekhan, expects the company to deliver 16 percent CAGR in adjusted net profit over FY2022-FY2024E.

The stock is currently trading at a reasonable valuation, at 19x/17x of its FY2022E/FY2023E earnings, Sharekhan added while maintaining a ‘Buy’ rating on ZEE with a price target of Rs. 400.

Dalmia of Proficient Equities added that “Sony is estimated to grow at a CAGR of 10 percent over the FY20-24 period, whereas for Zee, growth is expected to be 20 percent based on which the combined entity could have a profit of Rs 3,100 crore approximately by FY24”.

To be sure, the consolidated revenues of ZEE in Q2FY22 grew 14.9 percent YoY to Rs 1,979 crore, led by 20.7 percent YoY growth in advertising revenue and 5-fold YoY growth in revenue from other sales and services.

Net profit for the quarter was 187 percent higher YoY at Rs 270 crore from Rs 94 crore in the same quarter last year. Sequentially, net income grew 26.4 percent from Rs 214 crore in the preceding quarter.