Sony-Zee: How and why curtains fell on a mega media deal that was two years in making

The proposed merger between Sony’s India operations with Zee Entertainment Enterprises Ltd (ZEEL) collapsed in acrimony as the Japanese parent pulled the plug on a deal that’s been two years in the making. They had aimed to create one of the country’s biggest media and entertainment businesses amid a move toward consolidation in the industry.

“Sony Pictures Networks India Private Ltd (SPNI) (now known as Culver Max Entertainment Ltd), a wholly owned subsidiary of Sony Group Corp (Sony), today issued a notice terminating the definitive agreements entered into by SPNI and Zee Entertainment Enterprises Ltd,” the Japanese company said in a press release issued on Monday.

It also sought a $90 million termination fee, while invoking arbitration and legal actions against the Indian company “on account of alleged breaches by ZEEL,” potentially leading to a prolonged legal dispute.

The Punit Goenka-led company said it will contest Sony’s claims.

“ZEEL will take all the necessary steps to protect the long-term interests of all its stakeholders, including by taking appropriate legal action and contesting (Sony’s) claims in the arbitration proceedings,” the company said in a stock exchange filing.

Also read: What’s next for Zee Entertainment, promoter family, and Punit Goenka

The merger cooperation agreement (MCA) had been signed on December 21, 2021, and was valid for two years, extendable by a month for “good-faith” negotiations. That deadline expired with Sony unwilling to accede to Zee’s demand for another six months to resolve the matter.

“Although we engaged in good-faith discussions to extend the end date under the merger cooperation agreement, we were unable to agree upon an extension by the January 21 deadline,” the company said in a statement.

The deal is said to have failed over ZEEL MD and CEO Goenka’s candidature for the top job at the merged company, given that he’s facing investigation by the Securities and Exchange Board of India (Sebi). As ET first reported on November 4 last year, the Japanese side had proposed that NP Singh, an old Sony hand, be picked for the role instead.

Also read: End of Zee-Sony deal may trigger a spate of legal wranglings

Last-ditch effort
In a last-ditch effort, Goenka had even called up senior Sony Pictures Entertainment executive Ravi Ahuja to try and sort out matters, said people aware of the matter.

Goenka, who was in Ayodhya on Monday to attend the consecration of the Ram mandir, posted on X: “The deal that I have spent two years envisioning and working towards has fallen through, despite my best and most honest efforts. I believe this to be a sign from the Lord. I resolve to move ahead positively and work towards strengthening Bharat’s pioneering M&E company for all its stakeholders.”

The deal was originally planned to conclude at the end of FY22. However, delays in Competition Commission of India (CCI) approval, coupled with legal and regulatory challenges faced by the ZEEL promoters, ensured that the transaction kept getting delayed.

Also read: Sebi queries ZEEL ex-directors; shareholders weigh options

The development is a setback for both companies. Along with other traditional broadcasters, they are staring at shrinking linear TV profitability and widening losses from the streaming business.

Media veteran Kunal Dasgupta, who had earlier served as CEO of Sony’s India media entity, said it will have to remain content with a smaller, albeit, profitable business.

“Sony might look to acquire digital assets, while Zee will have to find another white knight,” he said. “The market has become very difficult for traditional broadcasters as their valuations have come under pressure due to the rise of digital.”

A Sony-ZEEL combine would have been India’s largest media company after Disney Star, which is currently in merger talks with Reliance Industries-owned Viacom18.

Twists and turns
The biggest jolt to the deal came when the Securities Appellate Tribunal (SAT), while setting aside the Sebi order barring Goenka from holding the top position in the merged entity, allowed the regulator to continue its probe against him over alleged diversion of ZEEL funds. Sony was not comfortable having Goenka at the helm from a corporate governance point of view, said the people cited above.

The company suggested that Singh lead the merged entity and complete the integration of two culturally diverse organisations.

To be sure, Zee said Goenka had agreed to give up the leadership position of the merged company in the interests of the merger.

Goenka “was agreeable to step down in the interest of the merger and proposals in this regard were discussed, including for appointment of a director on the board of the merged company, protections for conduct of pending investigations and legal proceedings in the best interest of ZEEL’s directors and shareholders and the consequent modifications to the scheme to incorporate the same,” ZEEL said in its statement.

That assurance doesn’t seem to have satisfied Sony.

“Sony was worried about the corporate governance blowback that the MNC could attract in Japan in the future if Goenka kept getting into trouble with regulators – and also they were getting increasingly concerned that Goenka would run the company as per his personal entrepreneurial style and not follow the corporate process-driven style that the corporation followed,” said a person close to the deal.

Zee’s top financial investors such as ICICI Prudential Mutual Fund (7.29%), Nippon India Life Asset Management (6.12%), HDFC Mutual Fund (5.26%), and LIC (5.12%) were tracking developments. They had multiple calls with the Zee management on developments, said people with knowledge of the matter.

Now what?
Goenka has a few options still open, according to people close to ZEEL. In the last few days, he has been approached by some investors, according to them. A financial investor has offered to invest and discussions were also held with a powerful business group. Some possible partnerships with regional groups are also being looked at, they said.

“I think Punit has made up his mind,” said a senior executive at Zee on condition of anonymity. “He will bring in an investor and restructure the business, keeping in mind the changes in the market, namely the Reliance-Disney deal and losses in digital businesses. His first order of the day now will be cutting down the Zee losses to a third in the next few months. He is not looking at a strategic partner for now, but he has a trick up his sleeve.”

NV Capital managing partner Nitin Menon said the collapse of the plan has implications for M&A deals in the media space.

“We will have to see if this will lead to a realignment in the mergers and acquisitions space,” he said. “Given the uncertainty over the last two years, it looks like the market might tilt towards becoming a seller’s market, with content owners having a slight advantage when it comes to pricing their products given that the merger has fallen off.”

Publicis Groupe South Asia CEO Anupriya Acharya said M&A deals, especially those involving big companies, are challenging because of the scale and complexities.

“Plus, the two parties need to agree on the objectives of the M&A activity, shared vision and the future of the merged entity, cultural and integration issues, etc,” Acharya said. “Something that looks good on paper may not necessarily get concluded.”