Zee Nosedives After Sony Scraps $10 Billion India Merger

(Bloomberg) -- Zee Entertainment Enterprises Ltd. plunged by a record after the cancellation of a planned $10 billion merger with Sony Group Corp. sparked a flurry of downgrades, with analysts predicting a sharp contraction in the Indian company’s valuation.

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At least eleven brokers including Citigroup Inc. and CLSA reduced their ratings on the Zee as efforts to create an entertainment giant in Asia’s biggest streaming market collapsed amid a stalemate over who would lead the combined entity.

The shares slumped 33% in Mumbai, the worst performance among members of the S&P BSE 500 Index. Zee traded at 23 times its one-year forward earnings before Tuesday’s fall, versus 17 times in September 2021 just before the company announced it had agreed to merge with a Sony Group entity, data compiled by Bloomberg show.

“Zee’s stock valuation will likely de-rate,” CLSA analyst including Deepti Chaturvedi wrote in a note dated Jan. 22, downgrading stock to sell from buy. “Zee’s PE will slump back to 12x levels, seen prior to the Sony merger announcement.”

The planned merger had played a part in helping India’s media stocks outperform the nation’s equity gauges in the past year. The Nifty Media Index dropped 13% Tuesday to its lowest since Aug. 8, as investors reassess the sector’s pricey valuations against the potential for future growth.

Sony was expected to benefit from Zee’s deep library of content in regional Indian languages and dozens of local television channels. Zee’s in precarious financial health and will facing growing competition, as Reliance Industries Ltd. and Walt Disney Co. near their own merger.

“Competition should intensify with the reported merger of Reliance and Disney Star,” CLSA analysts wrote.

The selloff was accompanied by surge in trading volumes, with 243 million shares changing hands — more than 10 times the daily three-month average, the data show.

“Institutional investors, mutual funds have strong ownership of Zee,” said Karthick Jonagadla, chief executive officer and founder of Quantace Research & Capital Pvt. “Only fund managers with strong conviction will continue to hold this stock for a potential recovery.”

(Adds comment in final paragraph. A previous version corrected day of week in third, fifth paragraphs.)

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