As the official announcement of the Zee-Sony merger termination rocked the industry on Monday morning, reactions started to pour in from the industry.

Most veterans decried the move, saying that in the long run, the merger falling through won’t be good for either player as consolidation is believed to be the way forward.

Reacting to the news, Ashish Bhasin, Founder of The Bhasin Consulting Group said that given the consolidation of their two extremely powerful competitors, this merger would have been beneficial to both the broadcasters and the industry. “If Zee and Sony had merged, the market would have seen two big players. Consolidation has begun, and it will only gain momentum over time. It would have benefited both Sony and ZEE had they been able to work together. However, there is still the prospect of combining later on, either willingly or by acquisition of shares, or by any other means,” said Bhasin.

Anupriya Acharya, South Asia CEO, Publicis Groupe, said that such developments as far as mergers and acquisitions are concerned, are not unusual. "M&A deals, especially those involving behemoths are complex and challenging because of the scale, and complexities. Plus the two parties need to agree on the objectives of the M&A activity, shared vision and the future of the merged entity, cultural and integration issues etc. Something that looks good on paper may not necessarily get concluded. As per media reports, Sony Group has formally notified Zee that it is calling off the merger; the fruition of which would have created a formidable entertainment giant. However, such developments are not unusual as far as M&A goes, because it takes many milestones to conclude such deals successfully."

According to Karan Taurani, SVP-Research Analyst (Media, Consumer Discretionary & Internet) at Elara Capital, this will harm both parties, as the companies have been facing stiff competition from digital media and a potential threat from the merger of RIL& Disney over the near term.

He further added that Zee has reported a muted performance in terms of growth and profitability over the last two years, as revenue growth has converged to 2.2% (FY20-24E) and EBITDA margin dipped to 10.2% (9MFY24E), due to losses in the OTT segment and lower growth in linear TV segment

Taurani also highlighted that Zee also signed a contract with Disney for sub-franchise of sports (ICC tournaments) rights on the linear TV side. "We had estimated annual losses of approx. Rs 15.2 billion due to the same in FY25 and beyond, due to hefty content cost, lower sports ad revenue and cricket content being available free on OTT," he noted.

He said that Zee may not fulfil its commitment on the same (has a cash balance of a mere Rs 6 billion, vs a potential contractual obligation of Rs 40 billion per year) as the above was a strategic decision, which could reap benefits due to ZEE-Sony merger. There could be a negative impact of a penalty or legal proceedings for Zee; however, PAT will see a positive impact due to the absence of sports losses in FY25 and beyond.

Taurani said, “We believe Zee will see a sharp de-rating of PE valuation multiples towards at least 10x one year forward or lower, due to the merger potentially being called off, as linear TV growth has converged sharply, Zee may not have any potential to scale up OTT offering in a highly fragmented market, and lower profitability - EBITDA margin ex-sports losses could converged towards 14% 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 - Zee could have potentially paid half of the $3 billion value for TV rights).”

As per the Elara report, there is also some likelihood that the shareholders (the top five shareholders owning 30% of Zee put together) may work together to do the deal with Sony without Punit Goenka; however, the process is time-consuming (6-12 months) and may lead to multiple legal hurdles between the promoter and institutions. There is also a potential of a local Indian conglomerate buying out Zee, if at all which too could provide some respite to valuations.

"Also, Sony could have to pay a penalty of $100 million, for calling off the merger as per media reports; we foresee that too will go through a legal hurdle due to disagreement between the two parties.

“However, over the near term, we foresee valuations to be under pressure, as a merger with Sony was the key driver for valuations to move up over the last two years. We believe in case of the merger being called off - the worst-case TP for Zee could be in the range of Rs 130 (including sports losses) and Rs 170 (ex-sports losses - assuming Zee does not fulfil sports rights commitment with Disney),” said Taurani.

Following the merger termination announcement, netizens responded to the news. Many Twitter handles posted that Punit Goenka is already in talks with Mukesh Ambani-led Reliance and is being advised by his legal team to chart the way forward.

(Compiled by Sonam Saini and Aditi Gupta)