Zee-Sony merger teeters on the brink of collapse

Two persons aware of Sony’s plans confirmed this on condition of anonymity.

In December 2021, Sony agreed to take over Zee and merge it with the former’s Indian arm Culver Max Entertainment Pvt. Ltd, earlier called Sony Pictures Networks India, to create an entertainment giant commanding a market share of over 28%. The deal has secured all regulatory approvals as well as shareholders’ nod.

On Sunday, Zee had requested Sony for more time to complete the merger. However, Sony has decided neither to extend the merger date beyond the 21 December deadline nor go ahead with the deal unless Chandra’s son Punit Goenka (current managing director and CEO of Zee) agrees to not hold the same position in the merged entity, the people cited above said.

“Sony is clear: It won’t extend the merger deadline. If Punit doesn’t change his decision, the deal will stand terminated," said the first person. “One has to put shareholders’ interest before personal gains. If this deal fails to go through, it will not only make Chandra and Punit’s control vulnerable as Zee promoters, but also may destroy shareholders’ wealth," the person added.

A statement from Sony Pictures Networks India (SPNI) on Tuesday said, “ZEE’s notice to the Bombay Stock Exchange and the National Stock Exchange of India dated December 17 is an acknowledgement that they will not be able to meet the December 21, 2023 deadline to close the SPNI/ZEE merger. The notice triggers an existing contractual provision in the deal that allows for both parties to discuss the possibility of extending the deadline. SPNI is required to start those conversations but has not yet agreed to a deadline extension. We look forward to hearing ZEE’s proposals and how they plan to complete the remaining critical closing conditions."

Mint first reported on 10 November that talks between the two parties have stalled after Sony’s demand for the CEO role, and that a failure to reach an agreement may derail the merger.

As per the original deal terms signed two years ago, Goenka was supposed to be the MD and CEO of the merged entity.

However, on 25 April, the Securities and Exchange Board of India (Sebi) accused Chandra and Goenka of diverting at least ₹200 crore from Zee via certain promoter group firms. Goenka challenged the order before the Securities Appellate Tribunal (SAT), which set aside the order pending the completion of Sebi’s probe.

The second person said that Zee is keen to close the merger, but is not getting the same vibes from Sony. “The whole scheme, which included Punit as the MD and CEO of the merged company for five years, was agreed upon and shareholders approved that. When there was a legal restriction on him from Sebi, he said that he would step aside in the interest of the merger. But now, when an appellate court has set aside Sebi’s order, for Sony to push for their candidate as the MD and CEO, is beyond reasoning. It’s like they think that they are above India’s legal system, which has removed any restrictions and allowed Punit to be the head of a large listed company."

While Sebi is still probing the matter and will pass a final order later, Sony is unwilling to let Goenka be CEO until he is cleared of all charges.

“A global firm cannot name such an individual as CEO of any of its businesses if the concerned country’s market regulator is probing him for potential violation of money-laundering norms. That will put the company’s corporate governance standards at a question mark and in turn the stock price at a huge risk of uncertainty. And Goenka and Chandra need to understand this," said the first person.

The two persons said that only if Goenka agrees not to seek the position of CEO may Sony agree to an extension by about 30 days for securing shareholders’ approval to appoint a different CEO.

Over the past few months, Sony has been pitching its India head N.P. Singh as the CEO of the merged entity, which has been opposed by Chandra and Goenka.

The uncertainty over the CEO appointment has kept Zee’s stock price in a range of ₹250-280 since August.

“The large shareholders are all upset that the promoter family (Chandra and Goenka) is playing this all wrong. But, Sony will not be hostile as this was always a friendly merger, and even if Goenka now opts out of his desired CEO position for the merged entity, he can always find a path back should the Sebi exonerate him," said the second person.

Zee’s large shareholders include Life Insurance Corp. of India (LIC), Nippon Life Mutual Fund, Amansa Capital, HDFC Mutual fund and ICICI Prudential Mutual Fund among others. The Goenkas hold 3.9% in Zee.

The delay in consummating the merger has also drawn criticism from shareholder advisory firms. On Saturday, at Zee’s annual general meeting (AGM), shareholders disapproved the Goenka-led board’s proposal to reappoint two of Zee’s independent directors Vivek Mehra and Sasha Mirchandani. Another independent director, Adesh Kumar Gupta, voluntarily withdrew his candidature just three days before the AGM.

According to Shriram Subramanian, founder and MD of proxy advisory firm InGovern Research Services Pvt. Ltd, a collapse of the deal will be a “lose-lose" situation. “As the competitive intensity in media industry has increased, Zee will lose out if the deal collapses. It would also be a personal loss for Punit Goenka," Subramanian said.

Some of the large Zee investors including The City of New York Group Trust, Legal and General Investment Management, The California Public Employees’ Retirement System, and APG Asset Management voted against the reappointments.

“The pressure is mounting as the deadline approaches. Sony is not keen to go ahead with any sort of hostile takeover attempt. If Goenka amicably agrees to leave the CEO seat for the time being but continue to remain in the merged company in a consulting role with a better compensation apart from the Rs. 1,100 crore non-compete fees, Sony may agree to extend the deadline. Otherwise, the deal and all its terms will stand terminated," added the first person.