The Great $10 Billion Merger Comes To Halt; Sony Signals End Of Negotiations Unwilling To Extend Good Faith Talks With Zee
In a significant development, Sony Group Corp appears to be concluding its good faith discussions with Zee Entertainment Enterprises Ltd, signalling the possible termination of a monumental $10 billion merger between their India operations. As the deadline for negotiations, set to expire at midnight on January 21st, looms closer, insiders reveal that Sony is unlikely to grant an extension, potentially paving the way for a formal termination notice. The disclosure of this termination is anticipated to reach key stakeholders, including the Chairman of the Zee Entertainment board, Punit Goenka, who serves as the Managing Director and CEO of the company.
The deadline for negotiations between Sony Group Corp and Zee Entertainment Enterprises Ltd. (ZEEL) has concluded, and Sony appears reluctant to extend the good faith discussions.
According to sources, Sony has sent a termination notice for the proposed $10 billion merger between its India operations and Zee, aiming to create the largest media giant in the country. Zee had requested an extension for the “good faith” negotiations last week.
Formal communication announcing the cancellation of the mega amalgamation, initially disclosed in December 2021, is anticipated to be submitted to the Tokyo exchanges within the next 48 hours, as indicated by knowledgeable individuals.
The Chairman of the Zee Entertainment board, as well as Punit Goenka, the MD and CEO of the company, are expected to be notified of this development.
These issues have intensified the existing dissatisfaction between the parties and disagreements persist, particularly regarding ZEEL MD Punit Goenka’s role as the CEO of the merged entity, pending clearance of charges that he misappropriated funds from the publicly-traded firm to privately held companies owned by his family’s Essel Group.
The Goenka family holds a 3.99% equity stake in ZEEL, with the remainder owned by public and institutional shareholders.
According to sources close to Sony, the multinational corporation has proposed offering Goenka the position of advisor at the new company but insists he should not be on the board until regulatory investigations are resolved.
Sony has advocated for NP Singh, its India MD and CEO, to assume the role of chief executive of the new entity in the interim unless Goenka is cleared of all pending cases.
The Story So Far
The report on January 9 indicated that Sony was on the verge of halting the deal. Subsequently, on January 19, it was the first to reveal that Group Corp had convened a board meeting the previous Friday, with an anticipated decision on the merger, and the likelihood of termination as early as Monday, January 22nd, or January 23rd.
Despite expectations for a last-minute change of heart from Goenka, sources close to Sony conveyed skepticism about such a development. Moreover, even if Goenka were to agree to step down on January 19, auditing of various CPs and final adjustments to the company’s finances would be necessary.
Since the merger announcement, Zee’s net profit has seen a drastic decline to Rs 48 crore in FY23, from Rs 956 crore in FY22 and Rs 793 crore in FY21.
According to many market participants, the termination is anticipated to prompt shareholder activism; Indian mutual funds and insurance companies, including LIC, collectively own 31% of the company.
The Bone Of Contention
The bone of contention revolves around the leadership position in the merged entity. According to the agreed terms and conditions, ZEEL’s Punit Goenka was supposed to lead the merged entity.
However, Sony has expressed reservations, citing market regulator SEBI’s prohibition on Goenka from holding managerial posts in Zee and any related entities due to a fund-diversion case.
Although the Securities Appellate Tribunal stayed the SEBI order, Sony remains uncomfortable with Goenka leading the merged entity during the probe, citing Japan’s stringent corporate governance policy.
The deal, inked between Zee Entertainment and Sony Pictures Networks India in 2021, had a stipulated two-year period for completion before December 21, 2023, inclusive of regulatory and other approvals, with a one-month grace period to finalize the transaction.
On December 17, the Subhash Chandra family-promoted firm sought an extension of the December 21, 2023, deadline from Sony Group Corporation (SGC) firms Culver Max Entertainment and Bangla Entertainment Pvt Ltd under the Merger Cooperation Agreement dated December 22, 2021.
Initially, Sony Pictures Networks India (SPNI) stated its disagreement with the deadline extension requested by ZEEL for the proposed $10-billion merger; however, it agreed to discuss the matter a day later.
The regulatory green light for the proposed $10-billion merger involving ZEEL, BEPL, and CMEPL had been secured, with approvals from the fair trade regulator CCI, stock exchanges NSE and BSE, as well as the company’s shareholders and creditors.
In August of this year, the Mumbai bench of the National Company Law Tribunal (NCLT) granted approval for the merger between ZEEL and Culver Max Entertainment.
This approval followed an interim order from Sebi, which temporarily restricted Essel Group chairman Subhash Chandra and Zee Entertainment Enterprises Ltd MD and CEO Punit Goenka from holding positions as directors or key managerial personnel in any listed company.
Sebi took action in response to their alleged diversion of funds from the company. Chandra and Goenka contested the Sebi interim order at the Securities Appellate Tribunal (SAT), leading to the quashing of the Sebi interim order in October.
In September 2021, Sony Pictures Networks India and ZEEL entered into a non-binding term sheet, outlining their intention to combine their linear networks, digital assets, production operations, and program libraries.
If the deal comes to fruition, the merged entity would possess over 70 TV channels, two video streaming services (ZEE5 and Sony LIV), and two film studios (Zee Studios and Sony Pictures Films India), establishing it as the largest entertainment network in India.
Subsequently, in December 2022, the two parties formalized their merger through a definitive agreement.
The Viewpoints
Critique of Institutional Investors in India
The perspective underlines the perceived ineffectiveness of institutional investors in India and the lack of institutional activism despite a family with a mere 4% shareholding allegedly causing harm to investors.
Should institutional intervention not prompt the removal of Goenka from office and ensure the execution of the merger?
Why is there the apparent passivity of major investment entities?
Recall of Past Financial Maneuvers by Zee Group
If we look into the historical incidents, specifically recalling how the Zee group allegedly manipulated public funds by acquiring stakes in IVRCL, only to later withdraw, incurring losses – these past financial manoeuvres raise concerns about the group’s financial practices and perhaps foster a lack of trust based on previous actions.
Scrutiny of Sony’s Decision-making
Sony’s decision to enter into the agreement, given the alleged malpractices of Punit Goenka and his father, calls for a probe by shareholders and relevant authorities into why Sony agreed to pay substantial money and one questions Sony for its involvement in the deal despite prior knowledge of the controversies surrounding the Goenka family.
Impact on Small Shareholders and CEO Accountability
What about the small shareholders?
The allegedly corrupt CEO of Zee attributed a significant decline in the company’s performance over the last two years to his actions.
What about the adverse consequences for thousands of small shareholders and questions about Goenka’s authority to dictate terms for personal gain at the expense of the majority?
The Last Bit, As the curtains draw on the high-stakes negotiations between Sony Group Corp and Zee Entertainment Enterprises Ltd. (ZEEL), the news of the anticipated termination of the proposed $10 billion merger looms large.
With the deadline for good faith negotiations expiring at midnight on January 21st, Sony’s reluctance to extend discussions points towards a formal termination notice being on the horizon. The impending communication, expected to reach the Tokyo exchanges within the next forty-eight hours, is set to formally call off the mega amalgamation first announced in December 2021.
The discontentment between the suitor parties, fueled by Zee’s lapses in meeting conditions precedents (CP) and concerns over its financial health, has cast a shadow over the negotiation table.
The unresolved issue of ZEEL MD Punit Goenka’s potential leadership in the merged entity, coupled with pending charges of financial impropriety, has fueled disagreements and added complexity to the situation.
As stakeholders await formal confirmation, the conclusion of this episode has left the industry and investors on the edge of anticipation for a possible resolution of this corporate drama, if any!
