India's Zee Entertainment dives 31% after Sony calls off mega merger

Shares of India's Zee Entertainment fell 31% on Tuesday after a division of Japanese tech giant Sony scrapped plans for a merger.

Sony first proposed to combine its India entertainment business with Zee in December 2021. Those negotiations collapsed after more than two years.

On Monday, Sony said that it terminated the merger because "among other things, the closing conditions to the Merger were not satisfied" by the agreed closing date. Sony said it had engaged "in good faith" discussions to get an extension to the closing date.

Zee said it denies all allegations made by Sony that it breached the merger agreement and that it would take "appropriate legal action." Zee is seeking a termination fee of $90 million.

Sony shares were less than 1% lower in Japan on Tuesday.

The merger of Zee and Sony's India subsidiary would have created a potential content and entertainment powerhouse in India. Zee owns several TV channels, a movie studio and a streaming service. Sony would have had access to Zee's local content, giving it a bigger footing in the lucrative Indian entertainment market. Zee, which faces intense competition at home from players like Disney and Reliance Industries, would have benefitted from the backing of Sony.

Zee said that its terms during the negotiations included the stepdown of CEO Punit Goenka and the appointment of a board director of the merged company.

Disney and Reliance Industries, India's most valuable company, signed a non-binding agreement in December to merger their Indian media operations, the Economic Times reported.

The collapse of the Zee and Sony deal sparked a round of downgrades from brokers. On Monday, Citi said the termination of the merger was a "material negative" for Zee and downgraded the outlook on the business' stock from buy to sell

"We expect the company's valuation multiple to trend substantially lower given increased risks around non operational/promoter group issues, capital allocation, and incremental liabilities from the merger termination," Citi said in its note.

Citi sharply slashed its price target on Zee's stock from 340 Indian rupees to 180 Indian rupees.

CLSA also cut Zee's rating to sell, putting a price target of 198 Indian rupees on the stock.