Zee Entertainment Enterprises (Z IN) Discontinuation of channel distribution through Media Pro JV ::JPMorgan

Zee Entertainment Enterprises (Z IN) Discontinuation of channel distribution through Media Pro JV		Neutral Price: Rs275.35 11 Apr 2014 Price Target: Rs280.00 PT End Date: 30 Sep 2014

Zee Turner Limited and Star Den Media Services Pvt Limited have decided to discontinue the distribution of their channels through their 50:50 joint venture Media Pro Enterprises Inda Pvt Ltd. The move is in response to change in TRAI’s regulation disallowing aggregators to bundle channels of multiple broadcasters in a single bouquet. Post the discontinuation, both broadcasters would set up their independent affiliate sales team for their respective channels.

A bit of background – Media Pro Enterprises is a 50:50 distribution joint venture between Zee Turner (a 76:24 J.V between ZEE and Turner International India) and Star Den Media (a 50:50 J.V between Star India and Den Networks), set up three years ago to aggregate and distribute channels licensed to Zee Turner and Star Den Media

Conference call takeaways:

· Bargaining power might be impacted – Independent distribution of channel might entail lower bargaining power relative to aggregate distribution under Media Pro. However, greater bouquet of channels and relatively larger market share of ZEE would aid the negotiation process.

· No material change in subscription revenue growth trajectory or channel launch plans - Mgmt highlighted that subscription revenue growth trajectory will not be materially impacted and the decision to split will not have any bearing on investment levels or channel launch plans.

· Incremental costs to be incurred – Independent distribution of channels via own sales team will likely entail incremental costs.

· Small broadcasters likely to be negatively impacted - The process of monetization of content will change, where broadcasters having a strong and varied bouquet of channels will have a relative advantage in the negotiation process over small broadcasters.

· Business to become independent in 60-90 days.

· Carriage fee not to be impacted – Carriage was being handled independently by the two broadcasters and will not be impacted.

· No bearing on international subscriptions since Media Pro was strictly for domestic purposes.

 

Investment Thesis

We think ZEEL remains a good play on the Indian media industry while business momentum remains good led by advertising outperformance and support from digitalization. We believe valuations cap upside at current levels of 26x FY15E P/E. Volatile margins due to sports losses and investments remain a concern though.

Valuation

We have a Sep'14 PT of INR280 based on a P/E(x) multiple of 24x, which is at ~10% premium to the company’s past three-year average multiple.

Risks to Rating and Price Target

Key downside risks to our PT are: 1) Market share loss on account of higher competition; 2) Higher losses for sports business and/or new media initiatives, and 3) Any new investments that could be earnings dilutive. Key upside risks include: 1) Further increase in ad growth rates and improvement in viewership ratings, and 2) Lower-than-estimated programming costs.

Consumer, Retail, Media

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