Zee Entertainment

Zee Entertainment stands to gain substantially from the channels it would get to own after Zee News de-merges and transfers them to the former.

Despite some equity dilution that the share swap ratio (Four Zee Entertainment shares for every 19 Zee News shares) entails, the six regional entertainment channels that Zee Entertainment would own could well be earnings-accretive for the latter. The share swap ratio has factored in the current market price of both the companies. The arrangement is to be completed by January 2010.

Investors who may have felt that the Zee Entertainment stock (Rs 242.1) was turning pricey at about 24 times FY10 can now look to hold the stock as, post-acquisition of the channels, its valuation multiple would shrink to around 19 times its likely FY11 earnings.

The stock can also be accumulated on declines linked to the broader market with a two-year horizon.
Huge beneficiary

Of the six channels that are to be transferred to Zee Entertainment, at least four hold immense potential. Zee Marathi is a market leader in terms of viewership while Zee Bangla is second in its market. Zee Telugu and Zee Kannada also figure among the top few viewed channels in the respective regions, according to data from TAM Media Research.

Zee News generates over 79 per cent of revenues from advertising, which is driven mainly by its regional viewership.

With regional advertising holding the key for most media companies — both print and television — in driving revenue growth, Zee Entertainment would benefit by the addition to its bouquet.



Evidence to this fact is that Zee News has seen its advertising revenues grow by 26.4 per cent in the latest September quarter compared to a year ago, whereas Zee Entertainment, with a pan-India reach, has seen a fall of 13 per cent on this front. The regional entertainment channels that Zee News is hiving off have contributed 65.2 per cent (or Rs 340.3 crore) of its revenues and 95.3 per cent (or Rs 79.7 crore)of its operating profits (EBITDA) based on FY09 numbers. The profitability has only improved in the first half of the current fiscal.

Zee TV has consistently been among the top two-three channels in the Hindi general entertainment space, the biggest and most lucrative genre.

This space is characterised by concentration among the top three as the gulf in viewership between them and channels such as Sony Entertainment and NDTV Imagine, is quite wide.

Zee Cinema, another property, also garners top viewership. These augur well for advertising spends of companies that look for slots that rake in maximum watchers.

Advertising apart, Zee Entertainment derives 45 per cent of its revenues from subscription. With the penetration of DTH and the digitisation mandated by the telecom regulator, this segment will also be a key revenue driver.

This creates a highly desirable mix aided by strength of the regional channels that it would own in growing advertising revenues.

Over the past year, the company has also reined in its biggest cost component incurred in programming and operating.

Though this acquisition would entail a dilution of 11.6 per cent for Zee Entertainment, the addition of the new channels to its offerings would more than compensate for this over the next two-three years.
Low on potential

From Zee News’ perspective, it is giving away its best channels in this scheme of arrangement.

Shareholders may retain the shares till they receive Zee Entertainment shares and may offload their holding in Zee News thereafter.

In any case at the current price of Rs 52.4, the market may have already factored in the swap ratio. After the demerger, Zee News would be left with channels that do not command substantial viewership.

Zee News is a distant fourth in the Hindi News segment, which has more than 10 players; Zee Business, second in the duopoly hindi business segment, commands little over half the viewership of market leader CNBC Awaaz. Zee Tamizh, Zee Punjabi and Zee 24 Gantalu have had little progress in garnering television rating points (TRPs) in their limited period of operations.

All this is likely to have a telling effect on advertising revenues that was the key to Zee News’ growth story.

News by itself does not garner the kind of viewership that general entertainment as a genre does.

A standalone news entity would be faced with an uphill task in scaling up revenues on its own , let alone generating profitability.

Most of the big news channels of large media houses have not turned profitable despite many years in operation, indicating the uncertainprospects that this genre faces.

via BL