Buy Zee Entertainment Enterprises Ltd.
Target price Rs236
CMP Rs239.50
Restructuring, a win-win deal
Buy Zee News Ltd.
Target price Rs60
CM Price Rs53.60
Huge value unlocking
Zee News (ZNL) is to undergo restructuring with its regional general entertainment channels (R-GEC) being transferred to Zee Entertainment Enterprises (ZEEL) in lieu of ZEEL’s shares. While ZNL has a strong franchise in the R-GEC space in Marathi, Bengali, Telugu and Kannada markets, the company has been largely undervalued owing to losses in new initiatives such as Zee Tamizh, the Tamil GEC. R-GECs reported Rs3.4bn and Rs1.87bn revenues and Rs797mn and Rs597mn EBITDA in FY09 and H1FY10 respectively. We expect R-GECs to be valued at 13x FY10E EV/E (at 20% discount to ZEEL’s EV/E) along with debt assumption of Rs1.5bn, implying an equity value of Rs14.4bn or Rs60/share. Our valuations assume a share swap ratio of 1:3.77, implying 14.7% dilution for ZEEL, while being EPS accretive. We raise FY10 and FY11 earnings led by conversion of the Tamil GEC into a predominantly news channel. We also raise target price to Rs60. Even without factoring in the upside from restructuring, upside exists in ZNL owing to the conversion of the Tamil GEC. Maintain BUY.