Opinion
Zee-Sony: A deal that was doomed from the start
Summary
- The proposed merger was odd, to say the least, with its majority owner not assuming executive control. An ‘agency problem’ risk of leadership and ownership interests going out of whack was averted. Don’t tune out, there’s more action to come.
Sony’s decision to terminate the planned merger of its Indian entertainment unit with Zee opens India’s TV broadcast sector up for fresh deal activity even as the two companies look set for a legal battle. Sony, in its letter of termination, alleged a failure by Zee to meet their pact’s conditions and has sought $90 million from it in damages. While the Japanese business hasn’t specified any violation, its broad discomfort seems to stem from Zee founder Subhash Chandra’s son Punit Goenka staying on as CEO of the merged entity. To be sure, this arrangement was part of the original deal struck more than two years ago. But the context has transformed since then. The Securities and Exchange Board of India began probing the father-son duo on charges of funds whisked away from the Zee group’s publicly listed firms, barring them from trading securities and board seats, although these bans were later lifted. The allegations remain unproven, but the shadow cast by them made Sony wary of an entity it owned facing regulatory action at some point. On its part, Zee has refuted Sony’s charge of failed obligations and claimed that Goenka was willing to step aside. What was meant to be a move that would reshape the market has thus ended in a fractious split-up, with a legal face-off now likely amid possible fresh attempts to snap up Zee, which is performing poorly.
Nevertheless, this isn’t the first time Goenka’s leadership has been a fraught issue. Just before Zee and Sony reportedly began talks and more than a quarter before they declared their late-2021 deal, Zee’s biggest minority shareholders Invesco and OFI Global China Fund, which together held nearly 18% of the broadcaster, had sought to oust Goenka and remake the board in a revolt driven by concerns of faulty corporate governance under him and other directors who may have been taken as beholden to the promoter family. That ouster bid was dramatic, but made no headway. Still, the episode marked the badly-faring Zee out as a takeover target; this instability saw Sony emerge as a white knight.
While management stability is customary in such a rescue, the equity structure of the combine under the 2021 pact was a jaw-dropper for being lopsided. Sony had agreed to buy a stake of nearly 51% in Zee, implying majority ownership, while letting Goenka run the show, although his family would’ve been left with under 4% of it. A plausible reason was that the acquirer wanted a larger share of the Indian ad revenue pie, but needed a local leader with a pulse of the market. After all, it isn’t easy to crack a complex maze of genres, languages, regions and preferences. Yet, the stake asymmetry would have borne the risk of an ‘agency problem’ that can arise if the interests of the chief executive and main owner diverge, especially if access to business data is tilted in the former’s favour. Such a prospect would have worsened Sony’s compliance anxiety. Since this part was overlooked in 2021, the merger was probably doomed to fail. The Zee-Sony breakup leaves the field open to other Zee suitors, or even Sony again. A few retail shareholders of Zee have rallied online for a way out. Elsewhere, TV advertisers are watching developments closely. A probable union of Reliance’s Indian media operations with Disney-Star’s, in which the industrial powerhouse will have a majority stake, could soon create a dominant broadcaster. Should it happen, for our TV advertising pie to be better contested, we would need a strong challenger. Zee must stay in play.
