Zee-Sony merger: Zee promoters need to raise a large sum to hike holding in new entity

The big-ticket merger between Zee Entertainment and Sony Pictures Networks India is as interesting as it is complex for a host of reasons. The big positive is the emergence (assuming the deal does go through) of an entertainment behemoth with a wide geographical presence. Sony will gain by way of access to key regional markets, while Zee, challenged by huge debt at promoter level, sees this as a way to cling on to a business built from scratch.
 
The official statement said Sony will hold a 52.93 per cent stake in the combined entity, with the other 47.07 per cent resting with Zee. Now, Zee Entertainment is a listed entity (unlike Sony) and the contours of the final shareholding will be known at a later date.

The term sheet inked between the two companies, according to the official announcement, allows the "promoter family (Zee) to increase its shareholding from the current 4 per cent to up to 20 per cent in a manner that is in accordance with the applicable law."

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Zee Entertainment's market capitalisation stood at Rs 30,630 crore at the end of trading on Friday, and with Sony, that number will increase. The 16 per cent increase in shareholding by Zee promoters will be a significant outgo, and how the money will be raised remains unknown.  

Vivek Menon, co-founder of NV Capital, thinks it will be an uphill task for Zee promoters at the current moment. He points towards the proposal to make Punit Goenka the MD and CEO for five years, and that means "the promoter family has probably the option to increase the stake over a period of time given the overall growth in the media and entertainment industry, especially in the OTT space."

According to Menon, the Zee-Sony merger with their respective OTT platforms would be of great strategic importance going ahead. "Looking at the overall valuation trend of OTTs globally, the combine could demerge that business to enhance its true value through either a private market transaction or going public."

There is no deadline involved for an increase in shareholding. As Mahesh Singhi, MD, Singhi Advisors explains, this is an option available to the shareholders of Zee as a part of the inter-shareholder agreement. According to him, the promoters may exercise the option by leveraging it or just getting another "aligned" investor sometime in the future. "However, it is, at best, an option and not a compulsion."

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Of course, all the effort is now on making sure the merger goes through. Given the size, it will be closely scrutinised by the Competition Commission of India and there is no saying if a new bidder throws his hat in the ring.

Menon emphasises on how Zee Entertainment has been the main focus of the group. "The promoter group can look at divesting its non-core assets to funnel that capital into enhancing their holding in Zee. For that matter, structured debt at the promoter level can also be raised," he adds.

The synergy between Zee and Sony is quite evident, be it in terms of geography, genres or the ability to really make a concerted bid for cricket's biggest events, IPL being the notable one. "The Zee promoters will definitely want to raise their stake to get the benefit of this synergy but there is a question on how they will do it," says Santosh Meena, Head of Research, Swastika Investmart.

Meena is betting on them "raising the stake gradually through the open market and also may sell assets to raise money." In whatever way they decide to do so, this story is far from being over and will need to be watched closely.

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