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Zee board gives nod to merge with Sony as founders fend off key investors’ demands

As part of the transaction, Punit Goenka will continue to be the managing director and CEO of the merged entity. (Photo: Mint)Premium
As part of the transaction, Punit Goenka will continue to be the managing director and CEO of the merged entity. (Photo: Mint)

  • Move  comes  as  founders  fight  to  foil  a  change  key  investors sought  in  its  management
  • Obtaining investor approval for the proposed merger and continuation of Goenka as MD of the combined entity may be challenging

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Sony Group Corp.’s India unit emerged as a white knight on Wednesday, offering to buy Zee Entertainment Enterprises Ltd, as the company’s embattled founders fought to foil a management change that the broadcaster’s largest investors demanded.

After a late-night board meeting on Tuesday, Zee told stock exchanges early in the morning that Sony Pictures Networks India proposed a merger under which the company will own 53% of the combined entity. Zee shareholders, including Subhash Chandra’s family, will own the rest.

As part of the non-binding agreement, Sony Group also proposed to invest $1.58 billion in the merged company to create content, build digital platforms and bid for sports broadcasting rights.

Connecting the dots
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Connecting the dots

Sony will get to nominate a majority of the directors on the board, but Chandra’s son, Punit Goenka, will continue as the managing director for five years. The merged company will remain listed on the stock exchanges. Shares of Zee surged 32% to 337.10 on Wednesday following the announcement.

The combined entity is expected to become the largest broadcaster in India with nearly a third of the market share in the entertainment space, surpassing Disney’s Star India network.

Abneesh Roy, executive vice-president at Edelweiss Financial Services, said the merged network would have a 27-28% market share versus Star’s 24%.

The proposed deal is expected to provide some relief to Zee’s controlling shareholders and Goenka. Last week, Zee’s top shareholders—Invesco Developing Markets Fund and OFI Global China Fund Llc—called a special shareholders’ meeting to seek a board recast, including the removal of Goenka as a director, citing corporate governance concerns.

Invesco and OFI, which own a combined 17.88% of Zee, also sought the appointment of six independent directors.

The transaction is subject to the completion of due diligence and execution of definitive agreements and regulatory and other clearances, including the approval of Zee’s shareholders, the companies said in a statement.

According to the agreement, Zee and Sony have 90 days to inspect each other’s assets and sign a binding agreement.

The merger will need approval from 75% of Zee shareholders, according to Shriram Subramanian, founder of proxy advisory firm InGovern Research Services Pvt. Ltd.

Obtaining shareholders’ approvals for the proposed merger and the continuation of Goenka as managing director may be challenging, given the stressed relationship between the two institutional shareholders and the management, said Ravishu Shah, managing director and co-head, valuation, RBSA Advisors.

According to the term sheet, Chandra and his family are free to raise their shareholding from the current 4% to as much as 20% later. This may not sit well with some investors, said Edelweiss’ Roy in a note released on Wednesday.

“This is a peculiar business arrangement, favouring Zee promoters to increase the stake. Sebi and Competition Commission will examine this minutely because there cannot be a different approach for promoters and other shareholders. This stipulation makes it appear to be a board coup against Invesco," said a media industry veteran, who declined to be named.

Invesco didn’t respond to an email seeking comment.

The merger “will create a combined content platform that can compete with domestic and global platforms and accelerate that region’s transition to digital," Ravi Ahuja, chairman, Global Television Studios and Sony Pictures Entertainment Corporate Development, said in an internal email to employees.

Analysts tracking the media sector said that the combined entity will own 75 television channels, two video streaming services, two film studios and a digital content studio to be a formidable media firm.

The consolidation in the broadcasting industry should come as a respite given the drop in advertising and subscription revenue during the pandemic and the uncertainty caused by the Telecom Regulatory Authority of India’s new tariff order, said Karan Taurani, senior vice-president, Elara Capital Ltd

“Sony is doing well in terms of sports and mainstream GECs (general entertainment channels), whereas Zee has a strong recall in the regional space, which is less or absent for Sony," Taurani said.

The merged video-streaming offering will also bring in differentiated content, given that SonyLIV has a stronger catalogue of sports and fiction shows such as Scam 1992- The Harshad Mehta Story, whereas ZEE5 is into regional web series.

Disney+ Hotstar is currently leading the race in India, with nearly 39 million subscribers. According to a recent report by Media Partners Asia, the number of its subscribers is expected to rise to 46 million by the end of the year, driven by the Indian Premier League that re-started this month.

SonyLIV and ZEE5 have around 6.8 million and 5 million subscribers, respectively.

“ZEE5 will no longer be seen as a marginal player and, in fact, the increased network share may have ramifications in terms of investments on the OTT side," said Sadanand Shetty, a media investor and observer from private equity and venture capital firm True Equity. While Sony had always been leading sports programming along with Disney-Star, there could be a focus on cricket with the IPL media rights tender due for renewal, he added.

Edelweiss gave a thumbs up to the proposed deal, saying it was good structurally and from a medium to long-term perspective.

“A listed entity of the US will now be the promoter, eliminating or addressing any corporate governance concerns, including those related to Goenka continuing as managing director, and ensuring the board that eventually comes in, after approvals, will be a richer one, in terms of experience," Roy said.

Shuchi Bansal and Bloomberg contributed to the story.

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