Domestic brokerage firm Motilal Oswal has recommended buy call on Zee Entertainment for target price of Rs 410 per share indicating an upside of 40 per cent from yesterday's closing price a day after its largest shareholder Invesco Developing Markets Fund said it will support the Zee-Sony merger deal.
"This comes as a big surprise given Invesco being the largest shareholder (18 per cent), thus strengthening the merger," Motilal Oswal said in a note to its clients.
"With the certainty of the merger being higher given Invesco's support and recovery in the ad market, the stock can potentially see a re-rating in its valuation. We value Zee at 25 times financial year 2024 estimated earnings per share and maintain our buy rating," Motilal Oswal added.
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Invesco said it will support the merger of Zee and Sony, contending the "deal in its current form has great potential for Zee shareholders" but added if it is not completed as currently proposed, Invesco retains the right to requisition a fresh EGM.
Two days after the Bombay High Court ruled that Invesco's call for EGM was legally valid, the investment firm in a statement said, "Since we announced our intention to requisition an EGM and add six independent directors to Zee's Board of Directors, Zee has entered into a merger agreement with Sony. We continue to believe this deal in its current form has great potential for Zee shareholders".
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Last year in December, Sony Pictures Networks India Pvt Ltd (SPNI) and Zee Entertainment Enterprises Ltd (ZEEL) signed definitive agreements for the merger of ZEEL into SPNI following the conclusion of an exclusive negotiation period during which both parties conducted mutual due diligence.
At that time Invesco along with OFI Global China Fund LLC, which together hold about a 17.9 per cent stake in ZEEL, had opposed the deal.
When the merger deal was announced in September 2021, the two networks had stated that Sony would invest $1.575 billion and hold a 52.93 per cent stake in the merged entity, while Zee will have the remaining 47.07 per cent.
Meanwhile, the Mumbai-based Motilal Oswal added that the stock trades at an attractive price-to-earnings valuation of 17.7 times on FY24 estimated earnings basis. "This is a far cry from its historic multiples of 25-30x about three years back. The potential re-rating will be governed by: a) recovery in the ad market and b) early completion of the Sony merger deal," Motilal Oswal said.
Motilal Oswal is also bullish on the company on the back of healthy subscriber growth in its OTT business.
"ZEE5 business witnessed a healthy subscriber growth, with improved daily active users and monthly active users and average time on the back of improved content and user experience. The of new content launches and investment in OTT should improve its network market share and sustain better ZEE5's key performance indicators. Its content pipeline remains strong," Motilal Oswal said.
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