Zee Entertainment’s (Zee) proposed merger with Sony after required regulatory and shareholder approvals has been called off.

With the merger terminated, Zee’s valuation will likely decline to 12x PE levels (Aug-21) seen prior to the merger announcement, foreign brokerage CLSA said in a report.

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The stock had de-rated in the past during the promoter share pledging crisis (in 2019) and fall in business cash conversion.

“We D/G Zee from BUY to SELL on a revised TP of Rs 198 (was Rs 300) based on 12x 1yr fwd PE. Also, competition should intensify with the reported merger of Reliance and Disney Star,” CLSA said.

Zee’s proposed merger with Sony after required regulatory approvals including from the National Company Law Tribunal (NCLT) and approval of 99 per cent of Zee’s shareholders has been called off.

Zee has received communication from Sony to terminate the merger and is seeking termination fee of $$90mn on alleged breaches (details in fig 2) by Zee and even invoking arbitration against Zee.

Zee is denying Sony’s assertions of breach and that Zee’s CEO, Punit Goenka, was agreeable to step down in the interest of merger, the report said.

“Zee’s stock valuation will likely de-rate. With Zee-Sony merger being terminated, we believe Zee’s PE will slump back to 12x levels, seen prior to the Sony merger announcement (August 21).

“This was also the period of Covid-19 second wave, while Zee’s stock PE had also de-rated in the past during the promoter share pledging crisis (in 2019) and the fall in business cash conversion,” CLSA said.

Zee’s corporate governance has been in focus, more so since the unprecedented promoter share pledging crisis of 2019 wherein Zee promoters (the Essel Group) repaid loans with multiple stake sales to investors in Zee and promoter’s shareholding came down from 42 per cent to 4 per cent, CLSA said.

Zee-Sony merger would have addressed Zee’s low promoter ownership challenge as post-merger Sony would have owned 51 per cent.