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BENGALURU : Zee Entertainment Enterprises Ltd and Sony Pictures Networks India will have to pony up a $100 million termination fee if either of them decide to end their $7 billion merger, making any move to break up not only hard but very expensive.

The separation clause won’t apply if the merger fails to secure shareholder and regulatory approvals, two senior Zee executives said, seeking anonymity.

“Well, not on account of shareholder approval, etc. It does not lead to any liability. But in the event we breach, then there could be," Zee’s chief executive Punit Goenka told analysts on 22 September in response to a question on the liabilities on the company if the merger fails.

“There is an exclusivity obligation on each other, and there is a penalty associated with it," Zee’s head of mergers and acquisitions, Vikas Somani clarified on the investor call.

Somani did not quantify the penalty, but it is $100 million, according to a person familiar with the deal. He declined to be named. Break-up fee is typically included in large acquisitions.

Emails sent to spokespeople for Zee and Sony seeking comment went unanswered.

The binding merger agreement envisages Sony owning a 51% stake in the combined company while Zee founder Subhash Chandra and his family have a 4% interest, leaving the remaining 45% shares with the current shareholders of Zee.

Zee’s Goenka will lead the combined company as CEO, while Sony will appoint the majority of the directors on the merged entity’s board.

Zee expects to complete the merger within 8-10 months, during which it expects to get approvals from the regulators, including the Competition Commission of India, the broadcasting ministry, stock exchanges and the National Company Law Tribunal.

The future of this merged entity rests on the real owners of Zee: the shareholders. For now, Zee has not disclosed by when it expects to put this merger to vote before shareholders.

The role of Zee’s largest shareholder, Invesco, the American fund manager which owns 17.88%, becomes crucial. Invesco, which first revolted against Zee, and demanded a special shareholder meeting in September, has not said whether it will vote on the deal after Zee and Sony signed a definite agreement on 21 September.

An email sent to Invesco seeking comment went unanswered.

In a letter dated 11 September, Invesco first demanded that Zee hold a special shareholder meeting, reconstitute its current board, remove Goenka, and induct six independent directors. Over the last 100 days, Zee has refused to cede to Invesco’s demands, and both parties are locked in legal fights before a company court in Mumbai and the Bombay high court.

Most analysts are bullish on the prospects of the merged entity, which will also become the country’s largest listed media firm.

“The merged entity’s ability to spend 3,000 crore annually is similar to Netflix’s 3,000 crore India content investment over the last two years," Motilal Oswal’s analysts Aliasgar Shakir and Harsh Gokalgandhi wrote in a 22 December note.

However, many believe that a lot of the success of the merged entity rests on how the merged entity improves its corporate governance records. Zee, in the past, has been plagued with questionable corporate governance policies, prompting three independent directors to resign in December 2019.

“Improving corporate governance and operational performance could significantly aid in the long run," the analysts with Motilal Oswal wrote in the note.

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