Zee Shares Slip After Merger Pact With Sony Amid Investor Spat

(Bloomberg) -- Shares of Zee Entertainment Enterprises Ltd., India’s largest listed television network, slipped after it approved a merger agreement with Sony Group Corp.’s local unit amid a complicated boardroom and courtroom feud between Zee’s founders and its largest shareholder.

Sony Pictures Networks India Pvt. will own a 50.86% stake in the merged entity while Zee’s founders will own 3.99%, according to an exchange filing Wednesday. Public shareholders will have the remaining 45.15% as part of the definitive agreement. 

The transaction will help expand Sony’s media business in the world’s second-most populous country where Zee commands 17% of the media and entertainment market. The announcement comes three months after Zee and Sony’s non-binding pact was made public on Sept. 22 that escalated a takeover battle between founder Subhash Chandra’s family and Atlanta-based Invesco Developing Markets Fund, which owns an 18% stake, the largest chunk of equity.

Zee’s board also approved the appointment of Punit Goenka, Chandra’s son, as the chief executive officer of the newly created entity, the filing said. Zee’s founders also agreed to cap the equity they may own in the combined company to 20% of its outstanding shares, according to the terms of the deal.

The deal, which still requires an approval from shareholders, didn’t enthuse investors. Zee’s shares fell as much as 4.3% on Wednesday during trading in Mumbai before erasing the intraday losses. The stock has gained 56% this year. 

The latest development shows Sony and Chandra are doubling down on their efforts to close this deal. While Chandra is keen to retain his family’s influence on the indebted media firm he founded in 1992, acquiring Zee will give Sony access to its more than 1.3 billion viewers globally, and a vast library of local Indian language content that goes back to the 1990s. Zee’s own streaming platform is also a leader among local players with almost 73 million monthly active users as of end-March.

‘Deep Moats’

“The sum is larger than the parts here,” said Utkarsh Sinha, managing director at Mumbai-based media consultancy, Bexley Advisors. “Combining Zee and Sony creates a much more defensible entertainment platform: both have large user bases, formidable content libraries and deep moats in content.”

the Zee-Sony combine will generate close to $2 billion in revenues and was not just to address the governance concerns, Goenka told Bloomberg TV. The proposed $1.5 billion infusion by Sony will enable the merged entity to bolster its digital platforms and seek marquee sport properties, according to Goenka.

“Sony would bring in its sports offering which Zee5 does not offer, whereas Zee5 would bring in the advantage of the regional genre, which is lacking for Sony Liv,” Karan Taurani, sector analyst at Elara Securities (India) Pvt. wrote in a Dec. 21 note. Zee5 and Sony Liv are the digital streaming platforms of the two media companies.

Invesco, unhappy with the way Zee was run, has been persistently seeking a shareholder meeting to fire Goenka from the board and as CEO.

Goenka’s Ouster 

Zee founders have instead blamed the U.S. fund of having a “certain larger design” in forcing a shareholder meeting. Invesco sought Goenka’s ouster after its attempts to facilitate a buyout of Zee in March by Reliance Industries Ltd. -- helmed by Asia’s richest man Mukesh Ambani -- fell through. 

The Bombay High Court is hearing Invesco’s appeal against an October order that barred the U.S. fund from calling a meeting of Zee’s shareholders. An adverse order for Zee could imperil the deal as Invesco didn’t support the deal with Sony as the terms, even when the non-binding pact was announced in September, allowed Goenka to stay on as the CEO and raise the founders’ shareholding in the combined entity.

The definitive agreement retains those terms. The merger transaction still requires regulatory, shareholder, and third-party approvals.

Referring to litigation led by Invesco, Goenka said the company will deal with it happens. “Having crossed the merger deadline, I think things should fall in place going forward,” he said.

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