Shares of entertainment major Zee Entertainment Enterprises Ltd (ZEE) hit the lower circuit in the opening trade today after Japanese media behemoth Sony Corp. terminated a mega $10 billion merger deal with the company, citing the inability to fulfil agreed terms. After the deal collapsed, multiple analysts downgraded the Zee stock, which has fuelled a downward slide in the share price in an otherwise positive market (Benchmark Sensex and Nifty, both are up 0.70%) today.

Shares of Zee opened a gap down at ₹208.6, down 10% against the last close. At the current share price, the Zee stock is trading 17.4% higher than its 52-week low of ₹172.25 hit on December 12, 2023. With this, Zee's m-cap has also dipped to ₹20,036.44 crore.

As the Zee-Sony merger deal turned sour, the analyst community also gave their negative verdict on the Indian media and entertainment company's stock. Researchers at CLSA say with the merger terminated, Zee’s valuation will likely decline to "12x PE levels (Aug-21) seen prior to the merger announcement". The agency has downgraded the stock recommendation from “BUY” to “SELL”.

"The stock had de-rated in the past during the promoter share pledging crisis (in 2019) and fall in business cash conversion. Now with the merger being called off, we D/G Zee to SELL (from BUY) with revised TP of Rs198 (was Rs300). Also, competition in the sector will likely intensify with the reported merger of Reliance and Disney Star," says a CLSA note.

Elara Capital in its report downgraded the Zee share to "SELL", with the target price pared to ₹170. It says the merger with Sony was the "key valuation driver" to move up in the past two years. "But given the termination, we downgrade Z to Sell with March 2025E TP pared to INR 170 from INR 340." 

Moreover, the brokerage says if the Disney contract is honoured, the target price may move to ₹130, citing losses in the sports segment. "We value the broadcasting business at 10x one-year forward P/E and OTT at 3.0x one-year forward EV/sales. Possibility of any other strategic/financial partner buying majority stake in Zee could provide respite to valuation multiples."

Similarly, CITI has downgraded the stock to "SELL", with the target price cut from ₹340 to ₹180. It says there are no operational concerns around the company, though an increasing competitive intensity takes centre stage now as the deal has fallen through. 

UBS has remained "neutral" in its rating of the stock, with the target price at ₹260. It says the implied value per share in the scenario of a merger falling through is ₹190.

Zee’s proposed merger with Sony after required regulatory approvals, including from the National Company Law Tribunal (NCLT) and approval of 99% of Zee’s shareholders, was called off on Monday as Sony sent a deal termination letter to the company. Sony has demanded that Zee must pay a termination fee of $90 million for “alleged breaches” and has even invoked arbitration against Zee. Zee has denied Sony’s assertions of the breach, and said that Zee’s CEO, Punit Goenka, was agreeable to “step down” in the interest of the merger.

Putting an end to a two-year-long negotiations, Sony on January 22, 2024, terminated the $10 billion mega-merger deal with Zee, citing the inability to fulfil the merger agreement. “After more than two years of negotiations, we are extremely disappointed that closing conditions to the merger were not satisfied by the end date,” Sony said.

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