After merger, Sony to have majority stake in ZEE Entertainment

Financially troubled Zee Entertainment Enterprises will merge with Sony Pictures Networks India (SPNI) in what will create the country's largest entertainment and media entity with a presence across platforms.

The board of ZEEL has provided in-principle approval for the merger that would also see SPNI infusing growth capital of about $1.575 billion into the newly merged entity for use in pursuing other growth opportunities

"The Board has evaluated not only on financial parameters but also on the strategic value which the partner brings to the table. The Board concluded that the merger will be in the best interest of all the shareholders & stakeholders," ZEEL said in a regulatory filing.

"The merger is in line with ZEEL's strategy of achieving higher growth and profitability as a leading Media & Entertainment Company across South Asia.

The merger would not have come at a more opportune time for both the entities that were scurrying for newer initiatives to stay relevant in the highly competitive market with wide-scale transformation in the Indian television landscape with increasing penetration of broadband services and regular launches of streaming video services.

SPNI had been present in india since 1995. But the network has not had a smooth run to either monetise its operations or expand it further from the present 26 TV channels, a film production and distribution unit and the widely-viewed streaming platform SonyLIV.

ZEEL on the other hand had been fighting worsening financial conditions with debt shooting off to over $ 2.4 on the back of a rapid and at time of unplanned expansion. The entity operates 66 linear television channels across 171 countries and is attempting to build the reach of its streaming platform, Zee5, around the world.

Zee parent Essel

In 2019, Essel (parent of Zee) brought in financial advisers Goldman Sachs to see whether the owners could sell their stake in ZEEL. Sony and Essel held talks on a possible merger or buyout of operations in 2019 as well but the talks could not reach any degree of finality. Essel is also understood to have held talks with James Murdoch's Lupa Systems and Comcast, but it resisted selling the stake to a business rival.

In 2019, agreement was reached to sell 16.5 per cent stake in ZEEL to US investment group Invesco Oppenheimer Developing Markets Fund that is currently running a battle with existing ZEEL management and has called for a EGM to remove them over violation of corporate governance norms.

The merger will try to correct some of these anomalies that would also see rejig of few channels while further sharpening the entities streaming services. According to the filing made on bourses, shareholders of SPNI, will hold a majority stake in the merged entity.

"The shareholders of SPNI will also infuse growth capital into SPNI as part of the merger such that SPNI has approximately $1.575 billion at closing, for use in pursuing other growth opportunities."

"Based on the existing estimated equity values of ZEEL and SPNI, the indicative merger ratio would have been 61.25 per cent in favour of ZEEL. However, with the proposed infusion of growth capital into SPNI, the resultant merger ratio is expected to result in 47.07 per cent of the merged entity to be held by ZEEL shareholders and the balance 52.93 per cent of the merged entity to be held by SPNI shareholders."

Merger details

Furthermore, ZEEL and SPNI have entered into a non-binding term sheet to combine both companies' linear networks, digital assets, production operations and program libraries.

The term sheet provides an exclusive period of 90 days during which ZEEL and SPNI will conduct mutual diligence and finalize a definitive agreement. In addition, the filing said that the merged entity will be a publicly listed company in India.

The move to merge ZEE also comes at a time when the entity is engaged in a boardroom brawl with the company's two largest shareholders expressing no confidence with existing management and seeking an extraordinary general meeting to sack a few directors, including ZEEL's managing director and CEO Punit Goenka. It needs to be seen whether existing ZEEL shareholders block the merger plan.

Interestingly, under the terms of the merger Goenka is expected to be MD and CEO of the new entity. The development comes as massive changes are taking place in the sector.

Additionally, not only will the development led to the creation of one of the biggest entertainment and media companies in India but will fulfill individual deficiencies that the two companies separately suffered.

ZEE strong across regions 

"Sony is strong in the Hindi GEC segment (especially in non-fiction space) where Zee is weak. Zee is strong in movies (across genres) and regional GEC space," said Ashwin Patil, Sr. Research Analyst (media) at LKP Securities.

"Zee has 18 per cent network viewership share and Sony should be 10-12 per cent in our view. Additionally Sony is strong in 'Sports' as well. Thus it would be a good strategic fit from broadcast, digital and content perspective."

In addition, Santosh Meena, Head of Research, Swastika Investmart said, "The recent announcement of a deal with Sony will be a very positive trigger for Zee ltd as it will have a quality promotor and that will ease the issue of corporate governance in the company."

"Though the deal is a nonbinding agreement so it will take some time for more clarity but this deal will bring a good synergy for both the company to grow their businesses and the combined entity will become the largest player in the industry."