Sony Group Corporation has ended its more than two-year attempt to merge its TV and streaming business in India with local giant Zee Entertainment Enterprises Limited (ZEEL).
In a statement released on Monday, Sony Group said: “The merger could not be completed by the end date due, among other things, to the closing conditions of the merger not being satisfied at that time.” [Sony Pictures Networks India] has held discussions in good faith to extend the end date, but the discussion period has expired without reaching agreement on an extension of the end date. As a result, on January 22, 2024, SPNI issued a notice to ZEEL terminating the definitive agreements.”
A separate statement from Sony in India struck an angrier tone. “Although we have had good faith discussions to extend the end date of the Merger Collaboration Agreement, we have not been able to agree on an extension to January 21st. “After more than two years of negotiations, we are extremely disappointed that the closing conditions of the merger were not met by the end date,” it said. “We remain committed to expanding our presence in this dynamic and fast-growing market and delivering world-class entertainment to Indian audiences.”
Sony Group's statement also said it “does not expect the termination of the definitive merger agreements to have a material impact on its consolidated financial results.” But it seems likely that there may still be some price to pay.
Sony may have had to pay Zee a $100 million termination fee under the original agreement, but this may no longer be the case as the penalty has expired. However, there is still a risk that they could be sued by Zee or its shareholders. Meanwhile, according to a statement from ZEEL, Sony is demanding a termination fee of $90 million “due to ZEEL’s alleged violations of the terms and conditions of [merger cooperation agreement], invokes arbitration and seeks injunctions against ZEEL. ZEEL categorically denies all claims made by [Sony vehicles] Culver Max and BEPL on the alleged violations of the provisions of the MCA, including their termination fee claims.”
“ZEEL’s board is considering all available options. Based on the guidance received from the board, ZEEL will take all necessary steps to protect the long-term interests of all its stakeholders, including taking appropriate legal action and challenging the claims of Culver Max and BEPL in arbitration,” the statement said further. “ZEEL has demonstrated its utmost commitment to the merger by taking several permanent and irreversible steps, resulting in one-time and recurring costs for ZEEL. However, the company will continue to explore organic and inorganic growth opportunities and leverage the intrinsic value of its assets.”
The merger of ZEE and Culver Max Entertainment, formerly Sony Pictures Networks India, would have been valued at $10 billion and would have included more than 70 linear TV channels, two video streaming services (ZEE5 and Sony LIV) and two film studios ( Zee Studios and Sony Pictures) gave birth to Films India) under one roof. That would have made it the biggest player in the country's still-significant linear TV market and strengthened its position in India's streaming sector, where consolidation is currently underway.
The deal was first proposed in 2021 and formalized in December of that year, before undergoing a process of regulatory and other approvals. The timeline set by the two companies to complete the transaction expired on December 21, 2023, but was extended by one month.
The deal was eventually approved by fair trade regulator CCI, stock exchanges NSE and BSE, the company's shareholders and creditors, and the Mumbai bench of the National Company Law Tribunal.
As the approval process progressed slowly, India's securities regulator Securities and Exchange Board of India (SEBI) separately released a scathing investigation report accusing Zee founder Subhash Chandra and CEO and managing director Punit Goenka of running the company for its own profits and “skimming” of funds. Goenka, who was supposed to be the chief operating officer of the merged Sony-Zee company, was barred from holding any executive position at a listed company from August.
Although the decision to ban him was overturned on appeal in October, allowing Goenka to assume the leadership role, Sony appears to have become deeply uncomfortable with the position as it may have violated Japanese corporate governance standards. In addition, Sony has a capable and highly respected successor in the starting blocks in India with Managing Director and CEO NP Singh.
After an initial grace period for Goenka, Singh's rise might have been possible anyway. The terms of the merger stipulate that Sony will hold the majority of the enlarged group's equity (51%) and nominate a majority of the board.
Over the weekend, Indian media reported that some of ZEE's institutional shareholders were preparing to appeal to regulators in India demanding Goenka's removal, saying his continued presence and protracted negotiations were destroying shareholder value.
ZEEL's Monday statement said that Goenka “agreed to resign in the interest of the merger and proposals in this regard were discussed, including appointment of a director on the board of the merged company, safeguards for conducting pending investigations etc.” of the directors and shareholders of ZEEL and the consequent changes to the plan of incorporation thereof.”
Perhaps just as important as the leadership disagreement over Sony's decision not to proceed with the deal was the issue of Zee's valuation.
While Zee's revenues have been stable at around INR 80 billion (US$960 million) per year over the past five years, profits fell from INR 9.65 billion (US$120 million) in the year ended March 2022 (the Numbers that come closest to the time of conclusion of the contract). ) to just INR 478 million (US$ 6 million) in the year to March 2023. Zee's current financial year also started with a quarter loss.
These difficulties were reflected in the share price, which fell by 25% from INR 371 on December 10, 2021 to INR 248 on January 19, 2024. The early January market capitalization of INR 223 billion or $3.68 billion was poor compared to a contract terms implying a valuation of nearly $5 billion.
Following the news of the contract termination, Zee shares fell another 6% to trade at around INR 231 apiece in early Monday trade on the Bombay Stock Exchange and NSE.
While the economies of scale, cost savings and stronger advertising power that the enlarged group may have had two years ago could justify the original deal price, it is not clear whether current market dynamics still support this analysis.
India's television sector has recovered after the slump during the COVID pandemic, but it is not growing quickly and new threats have emerged. Disney's market leadership through pay-TV company Star and streaming platform Disney+ Hotstar is being challenged by Amazon's Prime Video and Reliance Industries' Jio, a fast-growing telephony, broadband entertainment giant. Industry rumors now suggest that Reliance will close a deal to buy a majority of Disney's operations in India within the next month.
All of these factors seem to make it relatively easy for the Japanese company to walk away from a deal with Zee given its inflated price and toxic management.
However, the departure means Sony still needs to either sell or expand its Indian TV business. His options are unclear.
Sony may now be hoping to get rid of some of the pieces that regulators want to cut out of the joint Jio-Disney company. Or it could return with a new – and potentially hostile – takeover bid for the weakened ZEE.