Sony, Zee merger on despite Sebi shadow

Sony Corp. has no plans to back out of the merger of Sony Pictures Networks India (now Culver Max Entertainment Pvt. Ltd) with Zee Entertainment Enterprises Ltd, despite allegations of funds diversion made against its promoters Subhash Chandra and Punit Goenka by India’s markets regulator.

Sony remains fully committed to the merger in its original shape, three people with direct knowledge of the matter said, amid market concerns over the fate of the $1.7 billion deal.

Ravi Ahuja, the chairman of global television studios and corporate development at Sony Pictures Entertainment, made a two-hour presentation to the board of parent Sony Corp. in Tokyo on Tuesday, taking stock of the ongoing developments and the prospects of India’s largest media and entertainment deal, one of the people said.

“For Sony, nothing has changed. After the board meeting on Tuesday, they conveyed their full commitment to the merger,” the person said, requesting anonymity. “There is a plan for the worst-case scenario—if Goenka doesn’t get a relief from the courts—but as of now, there is no discussion on that.”

On 12 June, the Securities and Exchange Board of India (Sebi) issued an interim order alleging that Chandra and Goenka siphoned off funds and barred the father-son duo from holding any position on the board or key managerial positions in any listed company. While Chandra stepped down as Zee chairman in 2019, his son, Punit, is Zee’s managing director and chief executive officer (CEO).

Zee has challenged Sebi’s order at the Securities Appellate Tribunal (SAT), which will next hear the matter on 26 June. In the interim, in a series of interactions over the past week, the two groups approved an alternative plan in case the worst-case scenario plays out.

“While the Sony board has conveyed its comfort to stay put with the merger deal with Zee, Sony Corp. chairman may soon seek a meeting with the government of India to discuss the potential the merger holds,” the second person said.

Sony’s commitment to the merger is primarily based on the Japanese conglomerate’s opinion that at ₹250 per share, Zee’s valuation for the proposed share swap is unlikely to be affected even if the stock price falls below ₹140.

“There is huge bandwidth to preserve the merger structure,” said the person. “This is because the dollar has significantly strengthened against the rupee since the deal agreement date. The dollar has gone up from ₹72 then to 83 now.”

According to the plan, Goenka will continue as the managing director and CEO of the merged entity unless the country’s top court upholds the Sebi order or finds him to be unfit.

“Another person may replace Goenka only if the highest court orders so,” said a third person, also requesting anonymity.

According to the original plan, Goenka would be the managing director and CEO of the merged entity for five years. However, after Sebi’s order, many are speculating that the proposed Zee-Sony merger may collapse.

“The continued investigation by Sebi is increasing corporate governance overhang on Zee,” said a 19 June note by BofA Securities.

“We have a No rating on Zee as we await visibility on whether the merger is going through or not. In a scenario Zee promoters are able to get a stay on Sebi order, and the merger goes through, the stock may re-rate on expectations of improving governance and synergies from the merged entity,” the note said.

On Monday, senior counsel Janak Dwarkadas, representing Goenka, told SAT that Sebi’s order lacked any material evidence of wrongdoing. He said the entire case is made up based on just the bank statements of group companies.

Sebi’s lawyers are expected to present their arguments on 26 June, and if its order is stayed by SAT and the regulator appeals the stay order, the deal can still move with Goenka as the CEO until a court determines his fitness to hold the post.

On the other hand, should SAT uphold Sebi’s order, Zee promoters can appeal the case, enabling Goenka to continue as CEO unless the Supreme Court rules otherwise.

The two groups have drawn comfort from the fact that Sebi’s order hasn’t impacted the value of Zee’s assets and its growth potential, the third person said.

“Also, over 96% of public shareholders have voted in favour,” the person added.

He said Sony and Zee do not see any logic in reneging on the deal and paying a break-up fee.

“If any party breaks the deal, it has to pay the other party $90 million. This may not be a big amount, but it is neither desirable nor necessary. Also, the agreement provides the flexibility to extend the long-stop date thrice or more from 21 December 2023,” the second person said.

Sebi and stock exchanges BSE and NSE have already given their no-objection certificates to the Zee-Sony merger.

According to the latest discussions, the first two people said both Sony and Zee feel that Sebi’s latest order has possibly been passed in “haste” without providing Zee, Chandra, or Goenka adequate opportunity to present their stance.

In its order, Sebi stated that the siphoning off of funds appears to be a well-planned scheme since, in some instances, the layering of transactions involved using as many as 13 entities as pass-through entities within just two days.