Zee to merge with Sony; Punit Goenka will be CEO & MD of combined entity

Chandra family to hold 4% stake in merged firm, with option to increase it to 20%

Zee Entertainment Enterprises (ZEEL) has found a white knight in rival Sony with the latter agreeing to merge its India entertainment business with the beleaguered firm, thus creating India’s largest entertainment network with about $2 billion in revenues and 26 per cent viewership share.

The ZEEL board announced on Wednesday that it had approved a non-binding term sheet with Sony Pictures Networks India to merge their operations, and that the promoters of Sony would invest $1.57 billion in the merged entity as growth capital.  

According to the indicative initial merger ratio, ZEEL shareholders will own approximately 47 per cent in the merged entity, while the promoters of Sony India will hold 53 per cent after the infusion of growth capital, it said in a statement. On the basis of the existing estimated equity values of ZEEL and Sony India, the indicative merger ratio would have been 61.25 per cent in favour of ZEEL. However, with the proposed infusion of growth capital, Zee’s stake is pegged at 47 per cent, it added.

While the promoters of Sony will have the right to appoint the majority of directors to the board, Punit Goenka, chief executive officer and managing director of ZEEL, will become the CEO and MD of the combined entity. Goenka’s appointment, however, will be subject to the necessary approvals from the nomination remuneration committee, the board, and shareholders of the merged company, the firm said.

In consideration of the existing promoters of ZEEL and their affiliates agreeing not to compete with the merged company, the promoters of Sony India will transfer around 2 per cent stake in such a way that the Subhash Chandra family will hold a total of 4 per cent in the merged entity. Consequently, Sony India will hold a 51 per cent stake in the merged entity, while Zee shareholders will cumulatively hold the remaining 49 per cent.

According to the term sheet, Chandra, who set up India's first private sector entertainment network, has the option to raise the stake up to 20 per cent. The family sold their stake in ZEEL to repay loans worth Rs 13,000 crore, taken from Indian banks for failed diversifications like infrastructure development.

"We have engaged with Sony in the past and this deal was signed after several months of discussions with Sony,” Punit Goenka told an investor call in the evening. Geonka said the deal was subject to approvals from the Competition Commission of India and Sebi.

The entire transaction is subject to an independent valuation conducted by both parties, ZEEL informed the stock exchanges before the market opened for trading.

Reacting to the news, shares of ZEEL closed 32 per cent up at Rs 337 a share, giving it a total market valuation of Rs 32,378 crore.  

Analysts said the transaction would create a new media and entertainment giant in India with a turnover of up to Rs 15,000 crore. According to the ZEEL consolidated numbers, the company made a profit Rs 800 crore on revenues of Rs 7,730 crore in the fiscal ended March this year. ZEEL had cash on books of Rs 1,853 crore. On the other hand, Sony Pictures Network India made a profit of Rs 976 crore on revenues of Rs 5,846 crore with cash on books of Rs 11,000 crore, as of March 2020. Sony India’s latest figures were not available.

Lawyers said the transaction may hit a legal hurdle due to differential treatment of shareholders, with the Subhash Chandra family getting an additional 2.1 per cent shares from Sony promoters as non-compete fee. “Merger terms envisage a non-compete arrangement between the promoters of ZEEL and Sony Pictures Networks India, which will provide an incremental stake of 2.1per cent to the ZEEL promoters in the merged company (indicative value of Rs 1,075 crore). It will be interesting to see how regulators and institutional shareholders respond to such a non-compete arrangement. The Sebi takeover code does not permit differential treatment between the promoter and public shareholders,” said Ravishu Shah, managing director & co-head - valuation, RBSA Advisors.

Also, obtaining ZEEL shareholders’ approval for the proposed merger, and for the continuation of MD and CEO of ZEEL as the head of the merged entity for the next five years, may entail challenges, considering the stressed relationship between certain institutional shareholders of ZEEL and the ZEEL board, Shah said.

“But the proposed constitution of the Board of the merged entity may help allay the concerns of certain institutional shareholders,” Shah added. There will not be any open offer for the shareholders of ZEEL as the Sebi Takeover Code exempts the acquisition of stake pursuant to a Scheme of arrangement for amalgamation/ merger.

The transaction was expedited after one of the largest shareholders of ZEEL, Invesco, sought an extraordinary general meeting for the removal of Goenka within three weeks. Two directors, Manish Chokhani and Ashok Kurien, quit the ZEEL board after proxy advisory firms flagged corporate governance lapses in the company. The ZEEL board later backed both directors.

Analysts said the transaction is a strategic fit as Sony is a strong player in the Hindi general entertainment channel (GEC) segment, especially in the non-fiction space, while Zee is strong in movies across genres and the regional GEC space. Zee has a 17 per cent network viewership share and Sony has 10-12 per cent. “Thus, it would be a good strategic fit from broadcast, digital and content perspective,” said a note from Dolat Capital to its clients.

Speaking about the transaction, R Gopalan, chairman, ZEEL, said the board had conducted a strategic review of the merger proposal between SPNI and ZEEL. “As a Board that encompasses a blend of highly accomplished professionals having rich expertise across varied sectors, we always keep in mind the best interests of all the shareholders and ZEEL. We have unanimously provided an in-principle approval to the proposal and have advised the management to initiate the due diligence process,” Gopalan said.

Financials 

Sony Pictures Network India

FY20 Profit: Rs 976 cr, Revenues: Rs 5,846 cr 

Cash on books: Rs 11,000 cr

Zee Entertainment
 

FY 21: Consol profit: Rs 793 cr

Revenues: Rs 7,730 cr 

Cash on books: Rs 1800 cr

Merged Entity*

Sales potential: Rs 12,500-15,000 crores 

Profit potential: Rs 1800-2000 crores 

Cash on Books: Rs 12,000 cr

Combined market cap as on date:  Rs 50,000 cr (based on ratio announced)

* Analyst projections