India's Zee slides 30%, Sony deal collapse stokes worries about its prospects

Shares in India's Zee Entertainment (ZEE.NS), plunged by as much as 30% on Tuesday, set for their worst day ever, after the collapse of its $10 billion merger with Sony's local unit fanned concern that it will fail to thrive.

At least six brokerages said investors should sell Zee's stock in the wake of the companies' announcement, according to LSEG data.

A Zee-Sony combination could have mounted a bigger challenge to the likes of Disney, Reliance (RELI.NS),and foreign streaming giants Netflix (NFLX.O), and Amazon (AMZN.O).

The breakdown in two-year talks also comes as competition is heating up with Disney and billionaire Mukesh Ambani's Reliance in talks to merge their Indian media assets, and at a time when Zee has seen declines in profit, advertising revenue and cash reserves.

Vivekanand Subbaraman, an analyst at brokerage Ambit Capital, said Zee's troubles with scaling up its business could see it lose its No.2 position in the Indian broadcast market.

"The challenge that Zee is facing is that the TV business has been declining at a fairly fast pace - its fiscal 2023 ad revenue is still 22% below 2019 levels."

Zee's net profit slid 68% in the first six months of the current financial year, as advertising revenue slipped 3.5% and expenses jumped nearly 20%. Its cash reserves dropped 40%.

The stock was last trading down 29% at 164.45 rupees, a loss of more than $800 million in market value and is now down 36% since the merger was announced in September 2021.

CLSA was among the brokers recommending investors sell, cutting its rating for Zee by two notches and slashing its target price 34% to 198 rupees.

That said, the average rating of the 19 analysts covering Zee has dropped to "hold" from "buy". Their overall median price target price has tumbled 16% to 253 rupees, according to LSEG data.

Only one analyst has forecast the stock will fall further, to 150 rupees, while the others expect it to trade between 170 rupees and 340 rupees in the medium to long term.

Brokerage Emkay Global said it does not expect Zee to go it alone and believes it will attract other suitors. However, it cautioned the failed deal could spur shareholder activism against Zee's management.

Sony said certain "closing conditions" to the merger were not satisfied despite "good faith discussions" with Zee. While neither Sony nor Zee elaborated on which conditions had been unfulfilled, the firms had been at odds over who would have led the combined company.

Zee had proposed that its CEO Punit Goenka take the helm, but Sony baulked after he became the subject of an investigation by India's market regulator.