‘Post merger, Z-Sony entity expected to become 2nd largest broadcaster in India’

Elara Capital has released its diet report titled, Media & Entertainment - Sony mirrors Z on ad revenue.

Here’s the content of the report:

Sony India reports a revenue decline of 2% and PAT growth of 6% YoY, well ahead of Zee Entertainment (Z IN, Rating, CMP: INR 223, TP: INR 300), which posted a drop in revenue of 1% YoY and a PAT dip of 76% YoY in FY23. In FY23, advertisement, subscription and total market share of the combined entity - Z/Sony (subject to approvals) stood at 24%, 16% and 20%, respectively. Post merger, the Z-Sony entity is expected to become the second-largest broadcaster in India in terms of market share.

Magnitude

Sony India’s advertisement revenue declined 5% YoY in FY23 to INR 33bn, in line with our estimates, vs Z’s ad revenue too fell 4% YoY to INR 41bn on the back of 1) inflationary pressures, and 2) cut in ad spend by new age & commerce verticals. Subscription revenue for Z remains flat YoY whereas Sony’s grew 15% YoY, as Sony outperformed Z due to strength in the urban genre, sports properties, and OTT price hikes. Sony’s PAT stood at INR 10,420mn, up 6% YoY, in FY23 with a PAT margin of 15.5% whereas Z PAT stood at INR 2,514mn, down 76% YoY in FY23, with a PAT margin of 3%, as Z faced pressure on 1)the content cost front, 2) investments in digital and 3) some write offs. Content cost of Sony has come off and PAT margin grew 110bp YoY. In FY23, Sony and Z’s ad revenue market share stood at 10.7% and 13.3%, respectively, whereas subscription revenue market share stood at 8.0% and 8.4%, respectively.

In terms of the total TV industry, Sony and Z had a market share of 9.1% and 10.4%, respectively. Hence, the combined entity (subject to regulatory approvals) had an advertisement, subscription and total market share of 24.0% YoY, 16.4% YoY and 19.4% YoY in FY23 and the is the second-largest entity in India in terms of market share after Disney Star India. Sony Liv, the OTT platform of Sony India, currently has 33.3mn users and provides 40,000 hours of programming in eight different languages; its YouTube channel is the third-most subscribed channel in the world, with 156mn global subscribers. Zee5, an OTT platform of Z, had 112mn average monthly active users (MAU) and 11.3mn daily active users (DAU) in FY23 whereas Z’s YouTube channel Zee Music has 134mn global subscribers currently. The merger would expand content creation as well as provide cost synergies, benefiting both firms. It is likely to go through this year, subject to regulatory approvals.

Triggers

As per news reports (https://tinyurl.com/2zmmwkkn), Punit Goenka will not be a part of Z management or on its Board due to restrictions set by SEBI and the SAT; this aligns with our view the merger will go through without Goenka being on board. The SAT-SEBI matter is expected to see a final outcome in the next three weeks post SAT last hearing which was on 10th July,2023. Further, Disney is looking for a strategic partner for its media business in India, which is another silver lining, as we believe Z-Sony merged company’s (subject to regulatory approvals) key strategy would be to become the market leader post the merger; however, in case of Disney realigning its strategy with a new partner, there may be cost-cutting measures, which, in turn, would make it easy for Z-Sony merged entity to gain potential market share in the medium term. Thus, we believe in the event the merger goes through post approval, it would be a rerating trigger for the merged firm.

We value Z’s core broadcasting business at 17x one year forward P/E, led by 1) merger synergy, 2) potential market share gains to displace Disney as the largest broadcaster, and 3) better CG (corporate governance) initiatives – MNC-backed company; therefore, we arrive at a merged company potential market cap of INR 612bn after incorporating the OTT business valuation (Zee and Sony) of INR 92bn, which is at tepid 3.0x one year forward EV/sales and cash infusion of INR 120bn by Sony. We arrive at a TP of INR 300 for Z based on a 47% stake in the merged company. There could be further potential upside beyond our target price , led by 1) revenue synergy (assumed only cost synergy for now), and 2) scale-up or break-even on the digital & OTT businesses, which could increase digital business valuation.