Zee-Sony Merger Unlikely To Be Called Off, Delay To Hurt Stock: Elara Capital's Karan Taurani

The proposed merger between Zee Entertainment Enterprises Ltd. and Sony Group Corp.'s India unit is unlikely to be called off due to the notice issued by the Competition Commission of India.

That's according to Karan Taurani, senior vice president at Elara Capital. "The CCI (notice) is more of an enquiry," Taurani told BQ Prime's Niraj Shah. "I don't think the merger will be called off."

The stock price of Zee Entertainment, however, could come under pressure if there is any delay in the proposed merger, he said. "We are all expecting a very sharp re-rating in terms of valuation multiples, primarily because of synergies that are coming because of the merger," he said.

According to Taurani, the stock is already at a fair valuation and the risk-reward is "very" favourable. "The stock may likely see a downside of five to 10% in the worst-case scenario," he said, while the potential upside will not be beyond 40% to 50%.

Zee Entertainment would see an upside in its stock movement on the back of the merger deal going through, with any delay dragging the upside possibility lower, he said.

Shares of Zee Entertainment tumbled the most in 10 weeks after the report of the CCI enquiry. On Thursday, Reuters reported that the competition watchdog said in a notice that the merger between Zee Entertainment and Sony will potentially hurt competition in the sector as the merged entity will have “unparalleled bargaining power".

Sony and Zee signed definitive agreements for the merger of Zee Entertainment into Sony Pictures Networks India. If the merger is sealed, the combined entity will have a value of $10 billion, Punit Goenka, managing director of Zee Entertainment, said in an interview last year.

Disney Deal Makes 'No Economic Sense' 

The exclusive TV broadcasting rights pact that Zee Entertainment inked with Disney Star to telecast ICC men's and under-19 global events for a period of four years does not make economic sense, according to Taurani.

The deal gives Zee Entertainment exclusive TV rights for the ICC Men's T20 World Cups in 2024 and 2026, ICC Men's Champions Trophy in 2025, and the ICC Men's Cricket World Cup in 2027, among others.

The acquisition could be an advantage for the media company as it will lead to a surge in viewership, Taurani said. Zee Entertainment, struggling over the last 12 months with subscriber losses, could see a big jump in eyeballs with the acquisition of TV rights. The investment in cricket is a good strategy to get a high pulse, he said.

However, Taurani said, “The economics of this business is not very favourable.” This is because this type of tournament garners high viewership in terms of India-based matches, he said, while the viewership of non-India-based matches tanks by 30% to 40%.

"You are betting on a property where you have 25-30% of the matches which are India-based and have a higher target audience, which has very good in terms of monetisation or ad pricing opportunity."

However, the cost of acquisition is 5%-7% lower than that of IPL rights, Taurani said. From a revenue perspective, this acquisition lags the IPL as the number of matches in India is lower.

"This acquisition does not make economic sense," he said.

Watch the full conversation here: