Zee’s fundamentals deteriorating, pose risk to merger with Sony: BofA

Stopping a week-long downward trend, the Zee Entertainment stock surged 7.21% today despite the promoters not getting any relief in the ₹200-crore fund diversion case so far. The stock opened at ₹176, as compared to the previous session close of ₹173.35, and surged to an intra-day high of ₹188.35. At the time of filing the story, the stock was trading at ₹188.95 on the BSE.

Additionally, leading investment banking and broking firm BofA Securities in its latest report said Zee's fundamentals are deteriorating on weak business, risk on the merger front, and SEBI (Securities and Exchange Board of India) probe. Notably, Zee has already received shareholders' approval for the proposed merger with Sony Pictures Networks India Pvt. Ltd. The deal, however, is still subject to regulatory and other requisite approvals.

"We expect Zee’s revenue growth to remain slow on back on a slower ad (lower spending/mix shift to digital) and subscription. Zee’s EBITDA margins have come down from 32 percent in FY19 to 14 percent in FY23 led by content/OTT investments," BofA said.

Commenting on the development, Sony Pictures in a statement has said it takes "very seriously" the SEBI's interim order, and will continue to monitor developments that may affect the deal.

The report says the SEBI probe is increasing the “corporate governance overhang” on Zee. On the Zee-Sony merger, Bofa said so far, there's no clarity on which way the SEBI order would go as the case is pending before the appellate forum. "We have a No rating on Zee as we await visibility on whether the merger going through or not."

The Zee stock has suffered a blow since the SEBI order restricted its promoters, Essel Group chairman Subhash Chandra and his son and Zee managing director and chief executive Punit Goenka, from taking directorial roles at listed companies on June 12, 2023. The negative development led to a selling upsurge and a fall of about 11.37% in the past week. With this, the market cap of the media and entertainment behemoth has also dipped to ₹17,635.14 crore.

The SAT also listed the matter for hearing next Monday. "The hearing has started and is continuing. List on June 26, 2023, for further hearing," the order signed by Justice Tarun Agarwala, presiding officer, SAT, said in the latest order.

Before that, SEBI, in its reply to the SAT, sought "urgent action" against the promoters of Zee Entertainment Enterprises in the ₹200-crore fund diversion case to protect investors and shareholders and safeguard the company management.

The SAT on June 15, 2023, had also refused any interim relief to the said Zee promoters against an order by the SEBI, which banned them from holding a director or key managerial position in any listed company.

In a freshly filed affidavit to SAT, the market regulator said the promoters indulged in violations as well as multiple "false disclosures" to cover up their "wrongdoings". "In the instant case, we have a situation before us where the Chairman Emeritus and the Managing Director and CEO of this large listed company are involved in a myriad of different schemes and transactions through which vast amounts of public money belonging to listed companies are diverted to private entities owned and controlled by these persons," the affidavit reads.