Zee on the brink of facing multiple legal proceedings

New Delhi, Jan 23: Zee Entertainment Enterprises could see a hit from related penalty/legal proceedings due to its battle with Sony over the non-compete fee, ongoing legal proceedings by various creditors of the Essel Group (Axis Finance, IDBI Bank etc.), and dishonouring of contract with Disney, Elara Securities said in a report.

"Zee had signed a contract with Disney for sub franchise of sports rights (ICC tournaments) in linear TV. We had estimated related annual losses of Rs 15.2bn in FY25E and beyond, given hefty content cost, lower sports ad revenue and cricket content being available free on OTT," the report said.

Zee may now not fulfil this commitment (cash balance of mere Rs 6bn, versus potential contractual obligation of Rs 40bn per year) as it was entered into given its strategic-synergistic contiguity with the Zee-Sony merger.

Zee may see a sharp de-rating in P/E valuation of its broadcasting business to at least 10x one-year forward or lower, due to the unfinished merger, as: linear TV growth has converged sharply, Zee may not have any potential to scale-up OTT offering in a highly-fragmented market, lower profitability – EBITDA margin, ex-sports losses, could converge to 14 per cent and any further write-offs on the inventory side or matters pertaining to related parties’ creditors or not honouring the sports contract with Disney (ICC tournaments – Z could have potentially paid half of the $3bn value for TV rights).

Merger with Sony was the key valuation driver to move up in the past two years, the report said.

Ashwin Patil, Senior research analyst at LKP Securities, said that Sony has terminated its JV/merger/acquisition with Zee considering various issues regarding legal, leadership, compliance etc., which got dragged for more than two-and-a-half years now.

This resulted in fall in share prices of Zee which were held for a long time hoping that this merger would propel the consolidated entity as the biggest media house in India.

Apart from that, Zee is operationally facing lot many challenges in the form of subdued advertising business, depleting viewership share in its key markets like Hindi GEC, Tamil and Marathi markets, competitive pricing in Subscription business and slow growing OTT business with competition from the biggies.

"Therefore, the stock is seeing a free fall on Tuesday and may see some buying post we see a further fall in it," the report said.