Why did the Zee-Sony Merger Fall Off?

Zee Group has always been talented in making alliances with the top players in the field. In 1992, they entered the entertainment world by joining hands with the Star TV group. With this collaboration, the Zee group received a transponder from satellite network AsiaSat on a lease which helped them enjoy a market share of 64% in the satellite sector by 1994.

Two years! That's how long Zee Group needed to become the dominant player in the market. And now, everything the group created seems to be in danger of falling apart because of one bad decision.

Zee Group made several contributions to the entertainment industry with the incorporation of Zee Telefilms Ltd. (former name of Zee Entertainment Enterprises). We remember watching shows on the Zee TV channel like Pavitra Rishta and Sa Re Ga Ma Pa, which were super popular and, quite frankly, way too long. Today, Zee Group has around 45 channels broadcasting worldwide. Apart from becoming a key player in the broadcasting industry, Zee Group was the first one to start the nation's first amusement park.

But things are not going as chummy for the conglomerate company as it was, 🎶 if I may quote Harry Styles!With the chaos of managerial authorities being barred by SEBI regulators and share prices sinking down, the merger delayed for three years now is now not going to happen.

So, before the many unreserved stops in the Zee-Sony merger train, how was the Zee group coping? 🚊

Zee-Sony Merger Meets Deadend

The Zee-Sony merger, once touted as a $10 billion (around ₹83,000 crore) media powerhouse, is now over. Sony has reportedly forwarded certain conditions, one of which includes the removal of Punit Goenka as CEO of the new entity.

Several factors have thrown the deal off the table:

Deadline Discord:

The initial timeline for completion was September 2023, later extended to December 22nd. Now, Zee seeks another extension, but Sony remains hesitant. This lack of agreement throws the future of the merger into doubt. Delays and legal battles have pushed up costs for both parties. Every extension necessitates renegotiation, potentially impacting the financial viability of the deal.

Leadership Limbo:

Disagreements on who will lead the merged entity have surfaced. While the initial plan named Punit Goenka (Zee CEO) as head, but the regulatory allegations and other troubles from the ones in power have caused resistance in this decision. The power struggle as of now complicates matters further.

Regulatory Roadblocks:

Legal hurdles have plagued the merger. SEBI's investigation into Zee and a court order barring Goenka from holding directorships added significant delays. While some hurdles have been overcome, their lingering impact creates uncertainty. This was also one of the biggest reason behind the delay in the merger achieving fruition.

The broader economic climate plays a role too. With a potential global recession looming, Sony may be re-evaluating the merits of such a large expenditure in a risky market. While the merger isn't entirely dead (as of now), it's undeniably struggling. Continued uncertainty, leadership disputes, and external factors could ultimately spell its doom.

Sony backed out of the merger due to the many delays from Zee Entertainment and the multiple roadblocks, and demanded a major fine. Zee had to pay ₹432 crore to Sony's Indian arm Culver Max Entertainment as part of the contract.

It's not short to say that Zee has been having a difficult couple of years.

Now read, what led to the reputed multinational conglomerate's interior wars with creditors and shareholders ahead.

The First Time

First come, first serve. This fact applies every time and to everyone, especially in the business world. Yes, there are challenges to doing something no one has done before, but if done right, then the profits are unprecedented. Zee Group, aka Essel Group, did many things before anyone else and did it wonderfully. The launch of Zee TV in 1992, India's first Hindi language satellite channel, and the establishment of India's first amusement park, EsselWorld, in 2001 are a few examples.

But then, the root cause for human downfall, "greed", struck the entertainment giant so badly that it is hardly coping. And like every damsel in distress, Zee Entertainment Enterprises is now clinging onto Sony to find its way back to the top of the world. This is not the first time the news of the future merger between both companies has helped Zee maintain its high profile.

Sony's India Arm, Sony Pictures Networks India, has been shouldering the burdens of Zee Group since the union talks began in 2021. Many experts believed that the merger would be a bad step for both Sony and Zee due to the non-uniformed balance the financials would entail. Apparently, Sony would be chipping in the maximum part of the cash in the deal, around $1.5-1.6 billion, which would be about ₹11,000-12,000 crore.

With this deal, the once-in-power Chandra family will regain control due to getting new shares with the merger. With this, Punit Goenka, the CEO & Managing Director, will be able to manage the merged entity more easily. This matter is not sitting well with shareholders like Invesco as they don’t find Punit Goenka as the managerial position good for the merger’s health. And so, Invesco filed a lawsuit against Zee in January 2022 to block the merger.

Alas, Invesco ended up losing the lawsuit, and the path for the merger became clear with approval from the Competition Commission of India (CCI).

Sony To The Rescue

One would argue that being a prominent player in the entertainment sector would give a substantial advantage to the group, right? But it hasn't been the case with Zee for years now. Let's compare Zee Entertainment Enterprises' share price before and after the announcement of the Zee-Sony merger.

As visible in the infographic above, the company's share price was ₹168.05 at the end of August 2021, whereas the year ended with a 112% increase in stock price. The breaking of the Zee-Sony merger in September 2021 led to a giant leap in the price chart.

Not only this, but the company also started to reduce its promoter pledge percentage from 90% to 5.38% in September 2021. And we all know what started in September of 2021, right? You guessed it right! The overtly famous Zee-Sony merger talk began this month, helping the Zee group find a way to handle the unstable financial condition.
The mess that Subhash Chandra, the Zee Group promoter, made by taking huge loans to enter the infrastructure sector was cleaned up with the arrival of the merger news. The investment ended a disaster for the Essel Group, bringing debts worth billions for the company.

The expectation of a profitable merger, which would likely boost the company's revenue, raised confidence in lenders. With the combination of debt restructuring and equity dilution, Subhash Chandra reduced the promoter pledge percentage from 90% to around 5%. This was a positive development for Zee as they improved their financial standing by paying off a debt of 383.30 Crores.

Today, when the company sees a pitiful CAGR return of -17.7% (as per five-year data), the merger with multinational conglomerate Sony seems to be the last saving grace for Zee.

Experts in the matter believe that the pathway for the merger would soon be cleared without any hiccups by the National Company Law Tribunal (NCLT).

The Bottom Line

So, amidst all the ongoing drama, the Chandra family would definitely be manifesting plans to capitalise as much as possible from this deal. After all, the role of protagonist to their damsel has been played by Sony for three consecutive years now.

The only question arises whether the Zee group's founders will get their original power back or will the ban placed on Subash Chandra and Punit Goenka by SEBI regulators be a start to the decline of the little control they exhibit. Along with the country, Insider would be watching for the conclusion to this mega drama with you all.

Stay tuned with our Bullets section for the Zee-Sony merger news.