Sony’s $10B Deal in India: Why It Failed

Sony India Deal Failed: Reasons and Consequences

Sony Group Corp has called off its $10 billion merger with Zee Entertainment Enterprises Ltd (ZEEL), one of India’s largest media conglomerates, due to a leadership dispute and a regulatory probe. The deal, which was announced in 2021, would have created an entertainment giant with over 100 channels and two OTT platforms, competing with the likes of Disney Star, Netflix, and Amazon Prime. However, the deal collapsed after Sony and Zee failed to agree on who would lead the merged entity, amid an investigation by the Securities and Exchange Board of India (SEBI) against Zee’s CEO Punit Goenka for allegedly faking loan recovery. The termination of the deal has negative implications for both parties, as Zee faces financial challenges and loss of cricket broadcasting rights, while Sony loses access to Zee’s content library and market presence in India.

Leadership Stalemate

The main reason for the deal’s failure was the disagreement over the leadership of the merged entity. According to the original pact, Goenka, who is also the son of Zee’s founder Subhash Chandra, would continue as the CEO of the new company, while Sony would own a 50.86% stake and the Goenka family would hold 3.99%. However, Sony became reluctant to appoint Goenka as the CEO after SEBI accused him of faking loan recovery to cover private financing deals by his father. SEBI also barred him from accessing the securities market for one year in June 2023. Although Goenka got a reprieve from an appellate authority against the SEBI order, Sony viewed the ongoing probe as a corporate governance issue and wanted to replace him with someone else. Zee, on the other hand, insisted that Goenka would lead the new entity as agreed in the 2021 pact and refused to accept any changes.

Regulatory Probe

The SEBI probe against Goenka was another factor that contributed to the deal’s collapse. SEBI alleged that Zee faked the recovery of loans worth Rs 2,200 crore from Essel Group entities, which were actually funded by private financing deals by Chandra. SEBI claimed that this was done to mislead investors and lenders about Zee’s financial position and to avoid defaulting on debt obligations. SEBI also found that Goenka was aware of these transactions and did not disclose them to the board or the shareholders of Zee. SEBI imposed a penalty of Rs 25 crore on Zee and its directors, including Goenka, and barred them from accessing the securities market for one year. Goenka challenged the SEBI order in the Securities Appellate Tribunal (SAT), which granted him interim relief in July 2023. However, the final verdict is still pending and the probe is still ongoing.

Negative Implications

The termination of the deal has negative implications for both Zee and Sony, as they lose out on a strategic opportunity to create a dominant player in India’s media and entertainment sector. For Zee, the deal’s failure means that it will have to face financial challenges and competitive pressures in a rapidly changing industry. Zee incurred Rs 366.59 crore in compliance expenses by September 2023, coupled with the collapse of the merger. It is also likely to jeopardise its four-year cricket broadcasting rights agreement with Disney’s Star, which was contingent on the completion of the merger. Zee may also face legal action from Sony, which is seeking $90 million as break-up fees for violating the terms of the merger pact and “invoking arbitration”, which ZEEL said it will contest legally.

For Sony, the deal’s failure means that it will have to reassess its India strategy as it loses access to Zee’s diverse content library and television channels. Sony had hoped to leverage Zee’s strong presence in regional markets and genres such as news, music, movies, and sports, as well as its OTT platforms ZEE5 and Alt Balaji. The deal would have also given Sony an edge over its rivals such as Disney Star, Netflix, and Amazon Prime, which are investing heavily in India’s booming digital entertainment market. However, without Zee, Sony will have to rely on its own content portfolio and distribution network, which may not be enough to capture a significant share of India’s media and entertainment sector.