ZEE Entertainment Enterprises (ZEE) or rather its promoters and controversies are like Siamese twins. In the last five years the stock is down by over 65 per cent, while the Nifty 50 is up over 70 per cent. That’s massive underperformance for what was ideally the country’s premier media company at a time when consumption trends in the media sector have been booming. Leverage at promoter entities, pledged shares, regulatory and legal issues, actions by major institutional investors have all plagued the stock, making it listless. All these issues involved the promoters and had much less to do with the company or its business.
Read more: Zee Entertainment shares fall over 6.50%
Amidst all these controversies, a merger with Sony Pictures (SPNI) was the surgery required to separate the conjoined twins. The merger will result in SPNI/Sony Global owning majority of the company and help do away with the overhang of corporate governance issues surrounding the promoters, which in turn had stressed the share price. There was scope for rerating in the stock, subject to the merger going through.
However just as the light at the end of the tunnel was emerging with regard to the merger getting consummated, one more issue has propped up. Yesterday SEBI banned the ZEE promoters -Subash Chandra and Puneet Goenka (who is also the CEO) from holding director or key managerial position in any listed companies. This follows serious allegations that the promoters had siphoned off funds from listed entities.
Given this new development, what is the road ahead for the shares and what should investors do?
SPNI holds the key
The current controversy can have binary outcomes. One, the promoters fight it out and appeal the ban with intentions of continuing to remain involved in the affairs of ZEE and SPNI walks away from the merger. This will be negative for shares.
Two, promoters while fighting the ban agree to moving away from affairs of the company, SPNI agrees to proceed with the merger and takes charge of the company and appoints a new CEO. This outcome will be a positive catalyst for the shares and can trigger a rerating. Ofcourse the second outcome also hinges on regulators not objecting to it amidst current investigations against the promoters, given the merger deal was sealed from Zee’s end by the promoters.
Today, the shares of ZEE after initially reacting negatively by over 6 per cent, have seen some recovery during the course of the day and down by only 1.5 per cent at the time of publishing this.
The reasons for the same could be because of these factors – one, the stock of ZEE was already trading at inexpensive levels under the burden of controversial promoters. At round ₹ 190 the stock was trading at one year forward PE of 18.2 times and EV/EBITDA of 10.8 times. These are not expensive for television and entertainments stocks given their high operating leverage during upcycles, growth prospects in India and profits currently impacted by investments in streaming business. Further these numbers do not reflect the merger synergies which can boost profitability in the medium term.
The other factor why stock reaction is not significant could be on hopes that the merger will proceed. While the allegations of siphoning of funds by Zee promoters can cast doubts on the financials of ZEE, a factor to consider here is that prior to getting its shareholders approvals, SPNI would have done its due diligence to verify the financials of Zee as they stand today. However this is only a plausible factor to consider and not a guarantee on the current financials of Zee.
So the key to this binary outcome hinges on what SPNI and Zee promoters finally decide on.
In our bl.portfolio edition dated July 31, we had recommended investors to buy the stock. Our thesis was contingent on the merger going ahead and the stock getting rerated post the same. Many procedures relating to the merger were already completed, while a few were still pending. Just a month back CEO of Sony (global) had stated that he was expecting the merger to conclude in 1H FY24.
For investors who had bought on our recommendation in July last year, we now recommend that you stay put. However be alert to commentary from Sony/SPNI on merger prospects. We will also provide an update when more clarity emerges.