Does Sony Still Have The Courage To Go For Zee Merger?

The Zee-Sony merger is just two steps away from being completed, and yet there are apprehensions on the fate of one of the biggest deals in India's entertainment sector. 

As it stands, having received all regulatory merger approvals, the merger requires Zee Entertainment Enterprises Ltd. and Sony Group to jointly seek approval from the Ministry of Information and Broadcasting for the new board of directors of the merged entity, and appointment of managing director and chief financial officer.

It also requires filing with the Registrar of Companies for the new merged entity as Zee will combine with Sony India. Zee shareholders will have around 47% stake in the merged entity and rest will be held by Sony. The merger will require delisting of Zee and relisting as a combined entity on stock exchanges.

Just two steps away but it seems the merger is far from completion, considering the deadline of Dec. 21. The sanctity of this deadline or extension depends on the two parties. The agreement between Zee and Sony allows for three extensions of the deadline. And yet they are yet to seek the first extension jointly.

The core issue is reportedly the role of Punit Goenka as managing director, given the recent regulatory cases against Zee promoter and group companies. While Securities Appellate Tribunal dismissed SEBI's interim order barring Goenka from holding any key managerial positions, it has asked the market regulator to complete the investigation. 

There is no doubt that this is considered as a key risk by the Japanese conglomerate, which takes prides in its governance standards. And what is surprising is Sony's silence. A company known to uphold high governance standard should be upfront and transparent on its view on the subject. 

Speculation and unsubstantiated reports of Sony seeking another person to head the merged entity is not in the best interest of Zee shareholders. More so given Sony's silence on the report even as Zee has issued denials. A new person at the helm of the merged entity at this stage would mean a certain extension of the merger timelines, and approaching the exchanges, regulators, NCLT and shareholders again for approval as merger condition required Goenka to be the managing director of the merged company. 

So what's at stake now?

The merger would have created a media entity which will have over 25% of the market share of the entertainment market. The combined entity together would have a revenue base of over Rs 13,300 crore at the end of FY23. 

But stock price and valuations tell a different story. Shares of Zee are already close to the pre-merger announcement price. The street, it seems, is factoring the worst-case scenario. The stock had rallied from the low of Rs 168 to Rs 260 levels on the back of marquee names buying the stock ahead of the merger announcement in September 2021.

The 12-month consensus price target is Rs 324, according to Bloomberg. Any positive announcement on the merger front and resolution of leadership issue will take the stock towards the target price, while a negative outcome will see it fall towards the pre-merger rally price.

The second biggest outcome at stake is Rs 10,000 crore of foreign direct investment into the merged entity by Sony Group. This amount would have helped the merged entity to consolidate its presence in the entertainment and digital space with footprints in the sports segment. If the merger goes through, this will be the sector's largest FDI.

And finally, whoever breaks away will have to part with break-away fee of $100 million under the merger terms.

A break-away also means Zee promoter stake will remain at 3.99%. This also brings frequent risk of shareholder activism against the management and the company. If Zee were to go solo, getting the investor confidence back, especially from institutional buyers, will be a tough ask given how domestic institutions had to wait for long for debt repayment by Essel Group, Zee's promoter entity.

Japanese companies have very low investment risk appetite—they would rather lose money than risk reputation. 

Does Sony have the appetite to take the risk?

Sajeet Manghat is Executive Editor at NDTV Profit.