The Free Press Journal

Zee-Sony break-up: What is Zee’s next option?

- A L I Chougule The writer is a senior independen­t Mumbai-based journalist. He tweets at @ali_chougule

So near, yet so far. That was the climax, like the plot of a daily soap, of the over two-yearlong Zee-Sony merger saga. What was ideally a win-win deal for both collapsed two weeks ago because both parties failed to address a few pending issues. The terminatio­n of the deal initiated by Sony pictures, now known as Culver Max Entertainm­ent, on January 22 claiming that Zee Entertainm­ent Enterprise­s Ltd breached the Master Cooperatio­n Agreement terms has demanded a terminatio­n fee of $90 million.

On the other hand, Zee has taken legal action on two fronts: it approached the National Company Law Tribunal for directives to proceed with the merger and simultaneo­usly, it has initiated arbitratio­n action against Sony Group at the Singapore Internatio­nal Arbitratio­n Centre for terminatin­g the agreement and their claim for a terminatio­n fee of $90 million. The broken merger plan has been intriguing in many ways and the developmen­ts on the legal front now are promising to be equally fascinatin­g.

The merger, the biggest in India’s media and entertainm­ent space, which was announced on December 22, 2021 was to be concluded within 24 months and had a provision for extension through mutual agreement. It was extended by a month, only to be called off by Sony exactly a month later. While the deal between the two television and digital entertainm­ent biggies to create an over 80,000 crore media and entertainm­ent giant with more than 70 entertainm­ent channels, two streaming platforms and two production studios, went through many torturous ups and downs, in the last six months, there were many if and buts about the merger going through.

Zee wanted Sony to agree to one of the agreement’s conditions for its CEO Punit Goenka to continue helming the merged entity, but Sony was wary of Goenka, since he was accused of financial impropriet­y by market regulator SEBI months earlier. Apparently, according to media reports, Goenka refused to relinquish the CEO position of the merged entity, while Sony was no longer willing to move forward with him at the helm. The tiff started soon after SEBI said in June that Goenka and his father, Subhash Chandra, Zee’s founder, “had abused their position” and siphoned off funds “for their own benefit”.

SEBI had also barred them from holding any executive or director positions in listed firms while its investigat­ion was on. However, in October an appellate authority gave partial relief to Goenka from SEBI’s ban, allowing him to hold these positions during the probe. Zee saw this appellate win as a green-light for Goenka to be CEO of the merged entity, but Sony disagreed. Next, according to media reports, Goenka offered to be the interim CEO of the merged entity while the search was on for another candidate, but Sony now wanted to appoint N P Singh, its head of India operations, as CEO.

Apparently, Zee expected Sony to relent since Zee, with 17% share in the television market, was a sizeable media asset Sony could leverage to boost its less than 10% market share. On the other hand, Sony expected Zee to yield, given its deteriorat­ing financials and the debt Goenka and Chandra needed to pay off. Sony also expected Zee’s larger shareholde­rs to prevail upon Goenka to step aside, given that the promoter-founder family holds only 4% stake in Zee. After the merger was called off, several brokerages downgraded Zee’s stock.

For any significan­t rerating in Zee’s stock, it needs a catalyst which could be in the form of the media company’s 96% non-promoter shareholde­rs swinging into action, like it happened earlier in September 2021 when Zee promoters were under attack by Invesco, a major shareholde­r then, which at that time was pushing for an EGM to oust Zee MD and CEO and restructur­e the board. Subsequent­ly, the Zee-Sony merger announceme­nt saved the day for Zee and calm down Invesco, which has since pared most of its stake in the media company. It needs to be seen what the shareholde­rs do now.

The merger would have addressed Zee’s low promoter ownership challenge as post-merger Sony would have owned 51%. Now the failed merger poses a significan­t threat to the Punit Goenka-led entity, as its precarious­ly low promoter holding exposes it to a potential takeover bid and a leadership revamp. According to rules, any person with or without holding any shares in a listed target company, can make an offer to acquire shares of the entity subject to a minimum offer size of 26%. Also, any shareholde­r or a group of shareholde­rs holding at least 10% in a listed company can move a resolution to change its directors. Thus, not just pacifying investors, Zee will have to guard itself against any hostile takeover risk.

If the merger had taken place, the value of Zee and Sony would have been Rs 14,771 crore, with a market share of 26%. As a result, the entertainm­ent space would have seen two big players — the other being Disney Star. Currently, Disney Star owns over 70 channels in eight languages, a streaming platform, and a film studio. Though the Zee-Sony merger has not seen the light of the day, another big merger is in the pipeline: Disney Star’s acquisitio­n by Reliance India, which owns Viacom 18 comprising 38 channels, a digital streaming platform and a film studio. The value of the combined Disney Star-Viacom 18 entity will be Rs 24,411 crore. According to industry experts, the merged entity will have 43% advertisin­g market share.

Speculatio­n in the industry is that the terminatio­n of Zee-Sony merger is likely to give Disney StarRelian­ce merged entity monopoly with no big player in sight to compete with it. Also, there is no player in the industry now for coming together with Zee. This will give Reliance a clear way to dominate India’s entertainm­ent industry. Reliance’s hope is that its financial heft will enable it to buy out rivals, which will give it sufficient market share to dominate negotiatio­ns with advertiser­s and production houses. Currently, the balance is tilted in favour of advertiser­s and content creators. While Sony is unlikely to match Reliance’s spending, it will be looking to deploy $1.5 billion that it had committed to invest if the merger of its India unit with Zee had gone through.

Zee is credited with many firsts, including pioneering satellite television in India in 1992. Since then, it has come a long way but the ride has not been easy for the homegrown company in the face of competitio­n with global players like Star and Sony and maintainin­g a place of its own. Now Zee’s journey ahead seems to be once again filled with challenges, since its options seem to be limited.

What was ideally a win-win deal for both collapsed because both parties failed to address pending issues

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