ZED Entertainment Enterprises Ltd.'s (ZED) stock fell to a low of ten per cent on Tuesday morning after Sony India called off a merger agreement. A number of brokerages then advised selling the stock, with price targets indicating a drop of up to fifty per cent. ZEE's stock dropped 10% to Rs 208.60 on the BSE, and some investors are now bracing for shareholder action against the company's management in the days ahead.
According to analysts, ZEE's corporate governance was a focal point earlier because of the crisis in promoter share pledging in 2019 and the decline in company cash conversion. "The Zee-Sony merger would have addressed ZEE's low promoter ownership challenge," they stated.
According to Motilal Oswal, a turnaround in earnings is not anticipated in the near future. ZED, it claimed, has not said whether it will move forward with the merger while the legal dispute with Sony might prevent it from exploring a combination with other companies or making operational changes. Disney is reportedly considering leaving India, and a deal with RIL was previously considered.
According to Nuvama, there was a decision-making divide in Sony's US and Japan offices and a shift in the industry dynamics that may have led to the deal's termination, including a possible agreement between Viacom and Disney Star.
"It is unclear what path ZED may take going ahead and there is limited clarity on the long-term outlook of the business," Motilal Oswal stated.
With the termination of the Zee-Sony merger, we predict that Zee's PE will return to the 12x levels observed before the August 21 announcement of the Sony merger. Zee's stock PE had previously declined during the promoter share pledge crisis (in 2019) and the decline in corporate cash conversion. This was also the period of the Covid-19 second wave. Based on our revised goal of Rs 198, we think Zee's valuation is likely to de-rate back to 12x PE, according to CLSA.
As stated in their press release, Emkay Global stated that the termination should lead to a legal battle between the two involved corporations. It also thinks that shareholder activism against ZED management may increase as a result of the termination. "In addition, we believe Zed will now attract more suitors for possible transactions. Because of the stock's poor competitive posture and escalating corporate governance concerns, we currently lower it from Buy to SELL."
