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Business News/ Companies / News/  Marriage called off, Sony, Zee brace for a separation battle
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Marriage called off, Sony, Zee brace for a separation battle

Sony demands $90 million termination fee; Zee refuses, signals legal action

On Monday, Sony called off its merger with Zee, which had been in the works for two years. (Photo: Reuters)Premium
On Monday, Sony called off its merger with Zee, which had been in the works for two years. (Photo: Reuters)

The two-year courtship between Sony Group Corp.’s Indian unit and Zee Entertainment Enterprises Ltd ended in acrimony on Monday, setting the stage for a legal battle and sparking uncertainty about the fate of both entities.

Sony ended the merger agreement and demanded $90 million in termination fees. Zee rejected the demand and said it plans to take legal action to protect stakeholder interests. The move came after a failed 30-day attempt to stitch together an agreement after the original deal deadline had passed. Sony has already moved an arbitration court in Singapore, a person aware of the matter said.

 

“After more than two years of negotiations, we are extremely disappointed that the closing conditions of the merger were not satisfied by the end date," Sony said in a statement, seeking termination fees. The board of Zee, which met soon after, rebuffed the demand, denied “alleged breaches", and said it is evaluating all options in a statement released to the media.

When contacted, both Sony and Zee declined to comment further on the matter.

Sudip Mahapatra, a partner at S&R Associates, noted that Sony did not specify the unfulfilled conditions in its statement. “The statement from Sony states that it is terminating the agreement as conditions precedent to the closing were not completed in time. It does not specify the exact conditions that could not be fulfilled. If the matter goes into litigation, Sony will need to establish the fact that certain conditions were not completed in time, which triggered its termination right.."

“On an interesting note, there was an obligation on the parties to negotiate in good faith to extend the deadline of the merger. Zee’s statement seems to suggest Sony did not constructively participate in such good-faith negotiations. It remains to be seen whether Zee will raise this as an issue in any future litigation," he added.

In late 2021, Sony and Zee had announced their-mega-merger, which would have created the largest entertainment company in India, soon after US investor Invesco failed to oust the leadership of Zee. The two parties agreed that Zee’s chief executive Punit Goenka would lead the combined entity; however, in April 2023, the market regulator barred Goenka from taking top management roles over a case of fund diversion. Though the ban was overturned, Sony insisted that Goenka step aside in favour of its nominee, stalling the talks.

Referring to Monday’s statements by Sony and Zee, Manmeet Kaur, partner, Karanjawala & Co., said, “Both parties claim to have taken certain steps in view of the agreement. Further, Zee claims to have shut down some business entities. The question with regard to monetary compensation by either party is subject to any amicable solution or litigation deciding claims and counter-claims by both parties."

Mint was the first to report on 10 November, and then on 19 January, that the deal could collapse over the leadership issue. With the merger now in tatters, the question of termination fees has come to the fore, but settling it may not be a straightforward matter, either.

Gaurav Mistry, partner, corporate at DSK Legal, stated that for a transaction to consummate, respective parties are required to fulfil certain conditions. “For the purposes of determining whether one party is liable to pay the penalty, it is important to understand the construct of the provisions, especially the nuances regarding the verbiage and the interpretation of these provisions and their applicability vis-à-vis the expiry of the end date and other factual circumstances."

The Zee stock fell 1.59% on BSE on Saturday, while the benchmark Sensex index closed 0.36% lower. The stock may open 10% lower on Tuesday on a spate of block sales, market participants said.

Experts feel that for Sony, which has just 7-8% market share in India, it’s just one legal hurdle, but for Zee, it may be a battle for its survival. “Zee promoters have been fighting court cases one after the other for over two years. First, their largest shareholder, Invesco, wanted to oust the family, when they found a white knight in Sony. Now, Sony is also out. Unless the Goenkas get someone to infuse funds, they are staring at a similar situation, where many minority shareholders will gang up against the family," said a senior media executive on the condition of anonymity.

Zee promoters, who hold just 3.99% stake in the company, will need to prepare a plan to pacify shareholders, and also find an investor to ward off any hostile takeover attempt.

“With less than 5% stake, you can’t run a publicly listed company in India. You are bound to be taken over by bigger players. Now that Sony is out, it’s going to be a massive blow to the scrip in the near term. But the problems won’t end here. They have not fulfilled the agreement with Disney Star for the TV rights of the ICC events. Failing that, even Disney may decide to sue them, which will further put pressure on the company," the executive added.

While Zee still has a strong presence in the linear entertainment space, it needs to make heavy investments in sports and OTT to survive.

Meanwhile, for Sony, the path ahead is not easy either. Its flagship Hindi general entertainment channel is losing market share, it has no presence in South India and is considered an urban-centric broadcaster. With more urban viewers cutting cord and moving towards connected TVs, experts feel Sony might lose its relevance among TV viewing audiences faster than anticipated. 

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Published: 22 Jan 2024, 02:16 PM IST
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