Shares of Zee Entertainment Enterprises Ltd (ZEE) surged 10% today amid reports of renewed merger talks with Sony Group Corporation. The company and Sony Group Corporation are re-engaging in merger talks in last-ditch efforts, about a month after the $10-billion deal was called off due to non-agreement over the terms.

Shares of ZEE opened a gap up at ₹187.70 and surged to an intra-day high of ₹199.85, up 10.6% from yesterday's closing price of ₹178.65. At the current share price of ₹299.50, the ZEE share is trading 34.6% below the one-year high of ₹299.50 touched on December 12, 2023, and its m-cap stands at ₹18,888.61 crore.

The Zee shares saw an upside momentum following reports that the company officials have re-initiated talks with Sony officials in a meeting in Mumbai, possibly to overcome differences that emerged in their earlier agreement. The key discussion points include a $300 million write-off on cricket rights, and the CEO position of the merged entity, among others.

Upbeat after its recent earnings report, ZEE feels confident about a gradual recovery in margins, which could start reflecting from H2 FY25. It also aspires to register an EBITDA margin of 18-20% for FY26, along with 8-10% revenue CAGR going forward.

In Q3 FY24, ZEE's advertising and other segment revenue declined 3% and 36% on a YoY basis to ₹1,030 crore and ₹100 crore, respectively. However, the subscription revenue recorded a 3% growth on a YoY basis, amounting to ₹920 crore. The advertisement revenue was impacted by the Cricket World Cup, and its recovery remains subdued due to FMCG companies still being circumspect about their volume recovery.

After its deal with Sony fell through, ZEE initiated a reset and is “taking measures around cost rationalisation, operational efficiency and content quality” to run the business as a standalone entity, says Keynote Research in its latest note on February 15. "Though ZEEL is actively implementing measures to revive the business and efficiently run business operations as a stand-alone entity, concerns around weak financial positioning, corporate governance, and litigation outcomes continue to remain."

Keynote Research has applied a "significant discount" (25% now versus 30% earlier) to ZEE’s 5-year median PE. "Therefore, based on our revised estimates, we downgrade our rating on ZEEL from NEUTRAL to REDUCE, with a target price of Rs 176 (~18x FY25E earnings).

On January 22, 2024, the Japanese entertainment behemoth Sony Group Entities put an end to two-year-long merger negotiations with ZEE, citing the inability of the latter to fulfil the merger agreement. Sony also approached the international arbitration court and sought a termination fee worth $90,000,000 for "alleged breaches" by ZEE. The $10-billion deal, which was initially announced in December 2021, would have created the country’s largest entertainment network with more than 70 entertainment channels giving an edge to its rivals such as Hotstar, Amazon Prime and Jio Cinema.

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