Zee - Sony Merger: Next Steps, Shareholder Approval And Counter Offers
The Zee-Sony merger will need to pass two thresholds of approval by shareholders of the listed company. Though, numerically, the outcomes of both are likely to be similar given the very low promoter shareholding in the company. For both, public shareholder support is critical.
On Dec. 21, after a 90-day negotiation period, the board of Zee Entertainment Enterprises Ltd. approved a scheme of arrangement that merges the listed media major with privately owned Sony Pictures Networks India Pvt.
The combination is expected to create an entertainment media behemoth in which Sony Pictures Entertainment Inc. will own 50.86%, Subhash Chandra and family, the promoter of Zee, will hold 3.99%, and remaining Zee shareholders will have a 45.15% stake.
In terms of key approvals needed for the merger;
Stock exchange, and Securities and Exchange Board of India approval.
Shareholder and creditor approval.
National Company Law Tribunal approval.
Competition Commission of India approval.
Ministry of Information and Broadcasting approval.
Some of these processes are expected to run in parallel, for instance the filing with the CCI is likely to happen concurrently with the process at the securities regulator. The scheme will then be filed with the NCLT, shareholder and creditor approval sought as well as the ministry's nod.
When, and if, the merger is approved by the regulators and NCLT, shareholders of Zee will be issued shares of the merged entity after a brief trading suspension to allow for the merger to take effect.
Two people, one on each side of the deal, suggested a timeline of six to 12 months based on the case backlog at the NCLT. They requested to remain unnamed due to the legal processes underway.
Public Shareholder Support Key To Deal Approval
While SPNI is a private company and hence will face no hurdle in shareholder approval, at Zee the approval of public shareholders will be critical as they own 96% of the company, both persons pointed out.
Promoter Subhash Chandra's family owns just 3.99%, most of which is pledged according to stock exchange filings.
Under company law, a scheme of arrangement is to be voted on as a special resolution—to pass it needs 75% of the votes cast in favour.
As this particular merger also involves the payment of a non-compete fee to Chandra (which he will use to purchase shares in the merged entity such that his shareholding remains at 3.99%), under SEBI regulations the merger also needs approval by a majority of non-promoter shareholders.
Given the low promoter shareholding, meeting both thresholds (75% of all votes and majority of public votes) requires similarly wide support from Zee's public shareholders.
The approval of foreign portfolio investors will be key to the deal as they own 57.18% of the company. The support of domestic mutual funds (7.26%) and insurance companies (8.30%) will also be critical.
The Invesco Hurdle
Needless to say, Invesco Developing Markets Fund will play an important role in determining whether the merger is approved.
The foreign investor, with affiliate OFI Global, is the largest shareholder of Zee with a 17.88% stake. It has been locked in a governance battle with the company's current board and management. The Zee board rebuffed Invesco's attempt at reconstitution and ouster of Punit Goenka, Zee's chief executive officer and managing director and son of promoter Subhash Chandra.
The non-compete payment to Subhash Chandra which Invesco said "gifts a 2% equity stake to the promoters of Zee in the guise of a non-compete".
And a provision allowing the Zee promoter family to raise its stake from the current 3.99% to 20% without specifying details on how or the timeline.
Both those features remain in the final deal, with modifications.
While the merger will lead to a dilution in Subhash Chandra's stake alongside all other Zee shareholders, SPNI will pay the promoter Rs 1,101 crore as a non-compete fee which Chandra will use to purchase 2.11% of the combined entity. This will help maintain his post-merger stake at 3.99%.
Zee Promoter Stake Increase
As part of the deal, Zee's promoter can increase his post-merger stake up to 20%. But the scheme does not provide the promoter "any pre-emptive or other rights to acquire equity of the combined company from the Sony Group, the combined company or any other party", a company statement said.
"Any shares purchased by the promoters (founders) of ZEEL, must be in compliance with all applicable laws including any pricing guidelines."
Yet, it's not clear if Invesco will approve of these. BloombergQuint's request for comment has not yielded a response yet.
Non-compete premium only to a promoter is not permitted under SEBI's Takeover Regulations. But a merger is exempt from that. The two persons cited above were hopeful the fee will not become a sticky issue for all public shareholders.
As for the provision allowing Zee's promoter to hike his stake—no right, call option or preferential treatment is being accorded to him, both said. They (Zee promoter) are on their own, one of them emphasised. They will have to buy from the market or if the company is raising fresh resources they will participate as an ordinary shareholder, the person said.
While Punit Goenka will be MD and CEO of the merged entity, an SPNI-led board should assuage investor apprehension such as Invesco's, the other said.
To be clear, under company law, even if a merger receives the necessary shareholder and creditor approval, it can be objected to by a shareholder holding not less than 10% stake or a creditor holding not less than 5% of outstanding debt. The NCLT examines such objection.
What About A Competing Proposal?
In the battle between Invesco and Zee's board, it was revealed that earlier in the year Mukesh Ambani -led Reliance Industries Ltd. had approached Invesco and Punit Goenka with a merger offer but Goenka had rejected it. The offer was never taken to Zee's board.
When this became public, Reliance issued a statement saying differences between Invesco and Goenka on promoter stake increase scuppered the deal.
"At Reliance, we respect all founders and have never resorted to any hostile transactions," the company said then. "So, we didn't proceed further."
No competing merger proposal or offer has been made while Zee and Sony were in the 90-day negotiating period, said the person on the Sony team.
Both persons said that may be required from a governance point of view but any competing offer would have to match Sony's commitment of a $1.5-billion investment in the merged entity to be worthy of serious consideration.
Besides, the Zee board may find it tough to violate a binding agreement with Sony unless the competing proposal was a concrete one, said the person advising Zee. For instance, a voluntary open offer under SEBI's Takeover Regulations that requires an upfront financial commitment to acquire 26% of the company's outstanding shares.
Sans this, chances of the deal becoming a three-cornered race are slim.