Nov. 7, 2009 (The Hindu Business Line) --
K.Venkatasubramanian
Despite some equity dilution that the share swap ratio (Four Zee Entertainment shares for every 19 Zee News (OOTC:ZEENF) 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 (NYSE:SNE) 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.
