Sony and Zee Entertainment: Merger Plans Cancelled

Sony-Zee merger deal terminated: What went wrong?

The proposed $10 billion merger between Sony Group Corp’s India unit and Zee Entertainment Enterprises Ltd has been officially called off by Sony, citing unmet conditions and a leadership dispute. The deal, which was announced in December 2021, aimed to create India’s largest entertainment company, with the financial strength to compete against global and local rivals. However, the merger faced several hurdles, including regulatory investigation, legal suits, and a standoff over whether Zee’s CEO Punit Goenka would lead the merged entity amid a probe into his conduct by India’s capital markets regulator. The termination letter from Sony came after a 30-day grace period ended over the weekend when the two sides couldn’t reach an agreement on a deadline set in late December. The termination of the deal leaves Zee vulnerable to competition as rivals strengthen their positions in the Indian media market.

Here are some more details about the deal and its challenges:

• The merger agreement was signed on December 22, 2021, after months of negotiations. Sony was to indirectly hold a majority of 50.86% of the combined company; the founders of ZEEL would hold 3.99%; and the other ZEEL shareholders were to hold a 45.15% stake.
• The deal was anticipated to conclude in 8-10 months, subject to regulatory approvals and other customary closing conditions. The merged entity was expected to have a combined revenue of over Rs 19,000 crore ($2.6 billion) and an operating profit of over Rs 6,000 crore ($820 million) for the fiscal year ended March 31, 2021.
• The deal was seen as a win-win for both parties, as it would give Sony access to Zee’s vast content library and distribution network, while Zee would benefit from Sony’s global expertise and technology. The merged entity would have a portfolio of over 75 channels across genres and languages, as well as digital platforms such as SonyLIV and ZEE5.
• However, the deal ran into trouble soon after it was announced, as Zee faced multiple challenges from its shareholders, regulators, and creditors. Some of the key issues were:
  • A shareholder revolt led by Invesco Developing Markets Fund and OFI Global China Fund, which together held 17.88% stake in Zee, demanded the removal of Goenka and other directors from the board, alleging mismanagement and corporate governance lapses. They also sought an extraordinary general meeting (EGM) to vote on their resolutions.
  • The Securities and Exchange Board of India (SEBI) launched an investigation into Zee and its promoters, including Goenka, for alleged violations of insider trading norms, disclosure requirements, and related party transactions. SEBI also issued show-cause notices to Zee and its directors, seeking their responses.
  • The Enforcement Directorate (ED), a federal agency that probes financial crimes, summoned Goenka for questioning in connection with a money laundering case involving Yes Bank Ltd., one of Zee’s lenders. The ED alleged that Zee had received loans from Yes Bank in exchange for investments in companies linked to the bank’s founder Rana Kapoor.
  • Zee’s creditors, including mutual funds and banks, expressed concerns over the company’s ability to repay its debt obligations, which stood at Rs 7,342 crore ($1 billion) as of September 30, 2021. Some of them invoked pledges on Zee’s shares or sold them in the open market, causing a sharp fall in the stock price.
• These issues created uncertainty over the completion of the merger deal, as Sony sought clarity on the regulatory approvals and the leadership structure of the merged entity. Sony also wanted to ensure that Goenka would not face any legal action or liability that could affect the merged entity’s operations or reputation.
• Sony and Zee had agreed to extend the deadline for the merger from December 21, 2023 to January 21, 2024, in order to resolve these issues. However, they failed to reach a consensus on whether Goenka would continue as the CEO of the merged entity or step down. Sony no longer wanted him as the CEO amid the regulatory probe, while Zee insisted that he would lead the merged entity as per the original agreement.
• As a result, Sony decided to terminate the merger agreement after the end date passed and the parties failed to agree on an extension. Sony issued a termination notice to Zee on January 22, 2024, citing unmet conditions and a leadership dispute as the reasons for the termination.
• The termination of the deal leaves Zee in a precarious position, as it faces competition from other players in the Indian media market, such as Disney+ Hotstar, Netflix, Amazon Prime Video, Viacom18 Media Pvt. Ltd., Star India Pvt. Ltd., and Reliance Industries Ltd. Zee will have to find a new strategic partner or investor to strengthen its financial position and content offerings, or risk losing its market share and relevance.