The climax of the ZEE Entertainment (ZEEL) drama has unfolded pretty much like the melodramatic soap operas on its flagship channel, ZEE TV. Just when everyone thought that it was the end of the journey of its high-profile founder, Subhash Chandra and his son, Punit Goenka (MD & CEO, ZEE Entertainment), in came an unexpected twist—on Wednesday morning, ZEEL and Sony Pictures Network (SPN) announced that they were merging and Punit Goenka would be heading the merged entity. The announcement said that once the deal came through, 47.7% of the shareholding would be held by the ZEEL shareholders, while 52.93% would be held by SPNI shareholders.

The news led to euphoria in the stock market and ZEEL’s stock price shot up by close to 30%. Just a few days ago when the ouster of Goenka seemed imminent, the stock market had rejoiced as it hoped that professional management would take over and the governance issues would finally be sorted. The analyst community’s angst has always been against Chandra and not his son. So, when it was announced that Goenka would continue as MD, the stock market didn’t have a problem, as long as the SPN had the majority stake in the business.

From a business point of view, the merger comes across as a win-win for both ZEEL and SPNI. While the ZEEL promoters will continue to have their skin in the game, SPNI finally gets to become the biggest media conglomerate in India with a 27% share—ahead of Disney-Star which has a 24% share of the Indian media industry. However, what can’t be ignored are the host of corporate governance issues in ZEEL—that came to light a few days ago—and its largest investor, Invesco, calling for an EGM to oust the promoters. Industry leaders had ruled out the possibility of a strategic investor coming on board unless the governance issues at ZEE were sorted out.

So, what worked in favour of Subhash Chandra, who is known to be relentlessly trying to retain control of the empire he had built? “It is just an eyewash, the idea is to divert attention from the multiple corporate governance issues that the promoter family is fighting across its multiple businesses,” points out the former MD of a leading media company. Apart from ZEEL and Dish TV which are facing the brunt of investor activism, there is news of trouble brewing at ZEE Media and ZEE Learn too. The investors want the promoters to exit from these companies also.

Industry experts are calling the ZEEL-SPNI merger deal an attention deflecting mechanism, as it is a non-binding term sheet between the two entities—with a negotiation period of 90 days during which ZEEL and SPNI will conduct mutual diligence and negotiate definitive, binding agreements. Therefore, there is every chance of the deal not working out. “The deal doesn’t have the consent of Invesco which has an 18.44% stake in the business. Invesco has put the promoters on notice for violation of corporate governance, so how can this announcement be made without Invesco’s consent,” asks a senior media industry professional.

The former media company CEO says that Chandra was in talks with SPNI six months ago for a potential merger and the deal fell through as Chandra wanted his son, Punit, to be the MD, and that didn’t augur well with SPNI. “The current deal is a deal with desperation,” he says. He goes on to say that Chandra would have revisited the deal to ensure that he doesn’t lose the race. “SPNI would have agreed to sign the term sheet since they would get a majority stake, but 90 days is a long time. After the due diligence, SPNI could even revise the offer,” says the former media company head honcho.

“SPNI has put in too many conditions. The document that they have released says that the final transaction would be subject to completion of customary due diligence, negotiation and execution of definitive binding agreements, and required corporate, regulatory and third-party approvals, including ZEEL shareholder vote. The deal will not go through as easily,” adds a senior corporate lawyer.

Industry observers are hinting at a strong possibility of Punit not being able to complete the five-year term as mentioned in the term sheet. “Invesco has called for an EGM to oust Punit, while it may approve the merger deal, it is unlikely if they will agree for Punit to head the merged entity. SPNI has figured that out, they know they don’t need to fire the bullet, Invesco would do it,” says an industry observer.

The stock market analyst community isn’t as sceptical. Though they acknowledge that the future of the promoters, in the long run, is a question mark, they believe that the deal will go through. “Invesco may not raise an issue since there is a stronger entity coming in. Growth capital which was a concern that Invesco had, will now get sorted. SPNI has announced that it would invest ₹11,000 crore once the deal goes through,” says Arun Kejriwal, founder, Kejriwal Research and Investment Services.

Under the terms of the non-binding term sheet, Sony Pictures Entertainment—the parent company of SPNI—would invest growth capital so that SPNI has a cash balance of approximately $1.575 billion at closing for use to enhance the combined company’s digital platforms across technology and content, ability to bid for broadcasting rights in the fast-growing sports landscape and pursue other growth opportunities.

If the merger deal goes through, the merged entity’s market cap would be in the region of ₹65,000 crore, which says a senior stock market analyst, would be too alluring for SPNI to let go of the deal. “They will have a huge bouquet of channels and they can command better advertising rates and their operational efficiencies will go up.” This analyst doesn’t expect governance to be such a big issue. “Governance issues will be a thing of the past. All the nominees on the board would be SPNI nominees, they will ensure there are no leakages,” he adds.

ZEEL and SPNI, according to Karan Taurani, analyst, Elara Capital, have ample synergies such as varied genre offerings and would thus intensify competition for the likes of Disney-Star. "Many genres may transition directly to digital, which should help ZEEL-SPNI command leadership in the medium to long-term. Performance in the Hindi GECs, regional GECs and other sports (ex-cricket) genres will be crucial to ensuring market share gain for the combined entity. Further, as per BARC, ZEEL-SPNI combined would command a 26.7% viewership share versus Disney-Star's 18.6% share," he adds.

In fact, SPNI was also in advanced discussion with Reliance-backed Viacom 18 for a majority stake last year, which fell through, and the analyst community believes that SPNI will do whatever it can to make the ZEE-SPNI merger work.

The ZEEL drama promises to have more twists and turns in the coming days. Will Subhash Chandra ensure that Punit Goenka is able to hold fort? Chandra will certainly not give up.

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