Zee Entertainment, a prominent player in India’s media landscape, faced a significant setback as its shares plummeted by 31% on Tuesday. This came in response to the cancellation of a proposed mega-merger with Sony, a division of the Japanese tech giant.

The merger proposal, initially put forward by Sony in December 2021 to integrate its Indian entertainment business with Zee, unraveled after more than two years of negotiations. Sony cited the non-fulfillment of closing conditions as the primary reason for terminating the deal, despite their efforts to secure an extension to the closing date through sincere discussions.

In response to Sony’s move, Zee Entertainment promptly denied all allegations of breaching the merger agreement and expressed its intention to take appropriate legal action. Additionally, Zee is seeking a termination fee of $90 million in light of the terminated merger.

The merger between Zee and Sony’s India subsidiary had the potential to create a content and entertainment powerhouse in India. Zee boasts ownership of several TV channels, a movie studio, and a streaming service, while Sony would have gained access to Zee’s local content, providing a substantial foothold in the lucrative Indian entertainment market. The backing of Sony would have been particularly beneficial for Zee, given the intense competition it faces at home from entities like Disney and Reliance Industries.

During negotiations, Zee put forth terms that included the stepdown of CEO Punit Goenka and the appointment of a board director for the merged entity. However, the collapse of the deal triggered a series of downgrades from brokers. Citi, for instance, characterized the termination as a “material negative” for Zee and downgraded its stock outlook from buy to sell. The financial institution also significantly reduced its price target on Zee’s stock, from 340 Indian rupees to 180 Indian rupees.

Adding to the downgrades, CLSA also took a bearish stance on Zee, assigning a sell rating and setting a price target of 198 Indian rupees on the stock. The fallout from the failed merger has raised concerns about Zee’s valuation multiple, with increased risks related to non-operational and promoter group issues, capital allocation, and additional liabilities stemming from the termination of the merger deal.

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