Sony Group has officially terminated its merger deal with ZEE Entertainment Enterprises Ltd (ZEE) and the domestic brokerage Nuvama Institutional Equities finds changes in industry dynamics such as a likely deal between Viacom and Disney Star and a gap in decision-making in Sony’s Japan and US offices among the key reasons for the merger deal falling through. While media reports suggested the MD & CEO Punit Goenka was the key issue, ZEE refuted the claims. Here are six reasons suggested by Nuvama that might have led to the deal call off.
Few subsidiaries not yet shut: Before the merger was announced, ZEE had two subsidiaries in Russia. Being an American entity, Sony cannot do business with entities linked to Moscow. ZEE also launched a channel in Africa, which was in violation of the agreement. Even after Sony’s request, Zee did not close or divest it.
Zee’s Margo investment still appearing on books: In April 2020, ZEE invested Rs 520 crore in Margo, which entered into a content streaming contract with Indian Railways. However, the contract was later cancelled and Margo moved the court. As part of the merger CP, Sony wanted Zee’s Margo investment to be disposed of and not included in the merged entity. As of date, the matter has not closed yet.
Industry dynamics changing: Reliance’s Viacom and Disney + Hotstar deal shall get wrapped up soon (with Reliance holding 51 per cent). Both the entities together hold major cricket broadcasting rights such as IPL, ICC and other Indian bilateral cricket series. Nuvama said for ZEE to be a serious player in sports and to scale up its OTT, it would have needed a financial partner.
Distressed profitability: Since the announcement of the merger, ZEE's profitability has eroded due to weak industry dynamics. For instance, on an absolute basis, Zee’s Ebitda and PAT slid 38 per cent and 48 per cent over FY21–23. Nuvama also expects a weak Q3FY24 from ZEE due to a QoQ drop in margins and a YoY drop in ad revenue.
Issues over appointment: The original agreement stipulated Mr Punit Goenka to be the MD & CEO of the merged entity. However Sony, citing Sebi's ongoing investigation against Goenka, did not want him to hold any executive position; instead, it wanted existing CEO Mr NP Singh to be at the helm.
As per ZEE's communication, Goenka was agreeable to stepping down in the interest of the merger and being appointed as a director on the board of the merged entity until the conclusion of pending legal issues in the best interest of stakeholders. Zee also stated it had proposed an extension for a maximum of six months thereof.
Claims over termination: Sony is seeking a termination fee of $90 million from ZEE. In response, ZEE refuted the claims and shall take legal action, contesting Culver Max’s and BEPL’s claims in the arbitration proceedings.
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