Zee-Sony: What next after the merger collapse?

File photo of Punit Goenka, the current managing director and CEO of Zee Entertainment Enterprises. (Right:) N.P. Singh, managing director and CEO, Sony Pictures Networks India. Sony was keen on Singh heading the proposed merged entity.  (Mint)
File photo of Punit Goenka, the current managing director and CEO of Zee Entertainment Enterprises. (Right:) N.P. Singh, managing director and CEO, Sony Pictures Networks India. Sony was keen on Singh heading the proposed merged entity. (Mint)


  • Both sides stand to lose, Zee more than Sony, especially if Reliance buys out Disney’s assets in India

New Delhi: When the two-year courtship between Sony Group Corp’s Indian unit and Zee Entertainment Enterprises Ltd (ZEEL) ended on a bitter note last week, few in the industry were surprised. Given Zee parent Essel group’s debt problems, a probe by market regulator Securities and Exchange Board of India (Sebi) into its promoters, as well as disagreements between Sony and Zee, the split was long anticipated.

Sony Group had agreed to merge its India unit with Zee late in 2021, combining their television networks, digital assets, libraries and streaming platforms to create the country’s largest broadcaster. Media experts had hailed the news back then, saying the two companies would complement each other.

While Japanese entertainment giant Sony has a decent catalogue of sports (sans any top cricket rights) and mainstream general entertainment channels, Zee Entertainment is one of the largest media companies in India. The latter owns and operates Zee TV and Zee Cinema, among several other channels, and has great recall in the regional space. Both Sony and Zee also said they have very strong movie libraries. Once merged, the combined entity would have taken on two large broadcasting networks—Disney Star (owned by Disney India) and Viacom18 Media Pvt Ltd—to grab a larger share of the advertising pie. With a combined viewership of around 28%, Zee and Sony would have threatened Disney Star in the broadcast segment (it is the current leader with over 30%), and competed with Viacom18 to acquire rights to more sports properties.

Viacom18, in which entities controlled by Reliance Industries Ltd are the majority shareholders, holds the digital rights to the Indian Premier League (IPL) T20 cricket tournament for five years, starting 2023.

Clearly, none of these synergies will happen now.

What went wrong?

According to the original agreement, Punit Goenka, the current managing director and CEO of Zee, was meant to head the merged entity announced in December 2021.

The proposal had received most regulatory approvals, including from the stock exchanges and the Competition Commission of India. However, banks that had lent money to companies belonging to the Essel group, ZEEL’s family-owned promoter, had objected to the merger alleging that they would not be able to recover their dues if the merger went through. The NCLT, however, assented to the merger last August. Banks and institutions such as IDBI and Axis Finance then moved the NCLAT against this order, and these cases are still pending before the tribunal.

Meanwhile, on 25 April last year, Sebi had accused Zee founder Subhash Chandra and Goenka, his son, of diverting at least 200 crore from the company via certain promoter group firms. Goenka had challenged this order before the Securities Appellate Tribunal, which set it aside pending completion of Sebi’s probe.

As Sebi is still investigating the matter, Sony was unwilling to let Goenka head the new merged entity and was instead pitching its India head, N.P. Singh, as CEO. 

While media analysts and many shareholders believe Goenka was opposed to this, Subhash Chandra, Zee’s founder, told Mint in an interview that this was not the case.

“Some shareholders may think that if Punit stepped aside, Sony would agree to the merger. But that is not true. This was already offered to Sony," he said. “As the founding family, we wrote to them and we had decided that even if Sony is demanding Punit’s separation, we will agree to it but let us at least meet once. But they even refused to give me time for a meeting to close this discussion. So if shareholders think that Sony would agree to the merger if Punit stepped aside, it is ill-founded," Chandra added.

Last week, some minority shareholders had written to large investors in the company asking for a shareholders’ meet. “We strongly request you to please wake up now and call for Shareholders meet as minority shareholders are feeling cheated, not only by Zee and its promoter but also by the larger shareholders like yourself who have all the capabilities," Ujjwal Shah, a shareholder in Zee, wrote.

Meanwhile, for Sony, the merger’s demise means the loss of an opportunity to capture Zee’s mass-market television channel bouquet. Making matters worse, both companies will have to individually contend with the threat emanating from any merger between Reliance Industries and Disney India, which is looming large over the entire industry.

Sony did not respond to clarifications sought by Mint.

Zee’s mountain of troubles

Termination of the merger will pose issues for both companies but the challenges are definitely graver for Zee. Not only is it dealing with a failing market reputation, but it will also struggle to raise capital from foreign or local investors henceforth.

“First the legal bits will have to be figured out as a consequence of the termination. Then, from a business point of view, the (need for a) cash infusion and the best partnership to leverage," said Chandrima Mitra, partner at DSK Legal, a law firm.

“Since the announcement of the merger, Zee’s profitability has eroded due to weak industry dynamics. For instance, on an absolute basis, Zee’s earnings before interest, taxes, depreciation, and amortization (Ebitda) slid 38%/48% over FY21–23. We expect a weak Q3FY24 from Zee due to a quarter-on-quarter drop in margins and a year-on-year drop in ad revenue," said a report by Nuvama Institutional Equities, a brokerage company.

A media analyst, speaking on condition of anonymity, agreed that access to capital is critical to stay relevant in the content creation game, and Zee may have limited options as far as partners go. “The overhang of the existing management will continue to impact the company’s valuation unless Punit (Goenka) decides to exit," the person added.

On the digital front, Zee’s video streaming platform ZEE5 is yet to make a mark and continues to suffer losses, unlike Sony’s digital business, which is profitable. “The (streaming) losses aren’t unique to ZEE5 but they will just hit harder now. OTT (over-the-top) is a heavy investment game," the person added. “While on the one hand, you have the likes of foreign giants like Amazon, whose losses are subsidized because of the e-commerce business, there is JioCinema on the other, which is on the warpath with sports and regional content." JioCinema is owned by Viacom18.

SonyLIV, an OTT streaming platform operated by Culver Max Entertainment, formerly known as Sony Pictures Networks India, meanwhile, has managed a distinct positioning for itself by focusing on non-fiction and small-scale web originals, with its fiscal prudence paying off big time.

As the pay TV universe shrinks and connected TV sets take over at least urban homes, things look brighter for the Japanese corporation. In contrast, ZEE5, which started off as a brand for the masses, decided to go upmarket along the way, losing its sense of identity in the process.

The challenges don’t end there. Disney Star, which had won television broadcasting and digital streaming rights for men’s and women’s ICC events, including the World Cup, in a closed bid in 2022, had given its TV rights—a sub franchising agreement—to Zee. A report by Elara Securities had estimated Zee’s related annual losses at 1,520 crore for 2024-25 and beyond due to the hefty cost (of acquiring these rights), lower ad revenue from sports, and cricket content increasingly becoming available free on OTT.

More importantly, sans the merger with Sony, Zee may no longer be able to fulfil this commitment given its cash balance of 600 crore, versus its potential contractual obligation of paying Disney Star 4,000 crore per year, Elara said.

Indeed, Zee could end up being sued by Disney Star for non-payment of the fees. The company, however, contends that its contract with Disney Star was contingent on successful closure of the merger with Sony (Disney Star disputes this).

On another legal front, the company could take a hit from ongoing cases filed by various creditors of the Essel group (Axis Finance, IDBI Bank and others) to recover their dues.

Who gains?

The subscriber base of Disney+ Hotstar has shrunk after it lost the digital rights to stream the IPL to Reliance-owned Viacom18.
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The subscriber base of Disney+ Hotstar has shrunk after it lost the digital rights to stream the IPL to Reliance-owned Viacom18. (HT)

The biggest beneficiary of Zee and Sony going their separate ways could be Mukesh Ambani’s Reliance Industries, which is said to be in talks with American entertainment conglomerate Walt Disney to buy its assets in India. Disney CEO Bob Iger has said that the company would like to stay on in India. However, the company has seen the subscriber base of its streaming platform Disney+ Hotstar shrink after losing the digital rights to stream the IPL to Reliance-owned Viacom18. On top of that, job cuts globally, the stagnating Indian TV market, and a loss-making OTT business have given rise to speculation that the company is eyeing the exit doors.

According to media reports, Disney and Reliance Industries have entered a non-binding agreement for a merger of their Indian media operations, under which Reliance will own a 51% stake via a combination of shares and cash, while Disney will hold the remaining 49%.

If the Reliance-Disney merger does go through, the combined entity will have the largest slice of the TV ad pie, at 40-45%, according to media experts. The merged entity will have approximately 100 TV channels, of which 70 will be from the Disney stable and the rest from Viacom.

Competitors in the TV and OTT space may also face increasing pressure to innovate, invest in content, and form strategic partnerships to stay competitive against the combined strengths of Disney and Reliance. The combined resources and content libraries of the two companies could impact traditional TV networks, especially if the deal leads to shifts in advertising revenue and viewer preferences.

Mergers and acquisitions aside, television networks across the board are already struggling to gain traction with viewers. According to a report by Mint last August, over 200 shows have been launched by leading Hindi general entertainment channels between 2019 and 2023, but less than 25% are currently on air. Over 130 shows have been launched since 2021, with approximately 40 of these currently on air.

“TV viewership has been dropping because broadcasters have forgotten the customer. They’re busy looking at each other instead of the viewer," said a senior broadcaster, declining to be named. The Zee-Sony merger was expected to bring the focus back to storytelling, the person added.

Besides, smaller media companies may find it challenging to compete with the scale and resources of a merged Disney-Reliance entity and might need to explore strategic partnerships or focus on niche markets to maintain their positions.

“With Reliance and Disney together, everyone else will be a distant second and third. This will definitely hurt both Sony and Zee in terms of their power with advertisers and distributors, resulting in more polarisation in the industry," the media analyst mentioned above said.

The impact would be massive from a distribution point of view, with other broadcasters squeezed for carriage fees—the fee paid by broadcasters to distribution platforms to carry their channels—and operators forced to keep the bigger entities happy. Sports rights, too, could come down since there would be fewer players competing. Meanwhile, the combined might of Reliance and Disney could put the competition at a disadvantage in terms of bargaining power for ad rates. And OTT industry rivals might be forced to introduce more free models to remain relevant to consumers.

Television networks may be shaky, but things aren’t rosy on the OTT front either. While JioCinema prefers to focus on sports and regional content, Disney+ Hotstar is going slow following Iger’s decision to slash costs. Prime Video works with a small coterie of mainstream Bollywood names, while Netflix remains too niche in terms of pricing and positioning.

“It’s a bad time for content creators. We had assumed the merged Sony-Zee entity would open doors. But as things stand now, by itself, Sony would be far too focused on P&L (profit and loss), while Zee is completely lost and just limping along somehow," said the head of a content studio, declining to be named.

No media expert, however skilled, could have anticipated how the termination of the Sony-Zee merger would spark so much interest in the space. But that twist in the tale, albeit expected, has still made everyone sit up with their popcorn and wait to see what happens next.

Gaurav Laghate contributed to the story.

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