The media and entertainment industry in India has been in the throes of change for the past couple of years, with technology being the main disruptor. Low-cost data and the proliferation of cheap smartphones have led to the mass adoption of new-age digital video streaming services, which are posing a serious challenge to linear television.
Several home-grown and global entertainment companies are trying to stay ahead of the technology curve by constantly innovating and upgrading their over-the-top (OTT) platforms, by significant investments, to make their offerings more relevant to audiences.
It appears that the time has finally come when this progressively deepening bond between entertainment and technology will necessitate companies in these two sectors to join hands.
Zee Entertainment Enterprises Ltd (ZEEL), India’s largest home-grown entertainment and broadcast company, announced on November 13 that the Essel Group will sell up to 50% of its promoters’ stake (which comes to around 21%) in Zee to a strategic partner who can help the company emerge as a “global media-tech player”.
The Essel Group, which has interests in packaging and infrastructure, apart from media and entertainment, has roped in Goldman Sachs as its investment banker and LionTree as an international strategic adviser for the proposed transaction.
“Subhash Chandra and family along with its advisers met in Mumbai over the Diwali weekend to undertake a strategic review of its businesses in view of the changing global media landscape,” the group’s statement on November 13 said. “The strategic review underscored the importance of technological advancements such as artificial intelligence (AI), Internet of Things (IoT), 3D printing, augmented reality, virtual reality and many more. There is informed recognition that the world is convergent today and the lines across media, telecom, manufacturing, and technology are thinner than ever…The review showed that the family needed to accelerate efforts to stay ahead of the fast-changing trends.”
In an interview with Fortune India on Wednesday, ZEEL’s managing director and CEO, Punit Goenka, said that it was a difficult decision for the family to part with a major portion of its holding in Zee, but one that was required to future-proof the organisation. Goenka clarified that his family wasn’t selling its stake in the flagship business with a view to paring the Essel Group’s debt or eventually exiting the business. But he did state that proceeds from the stake sale in Zee would be utilised to enter new businesses. Edited excerpts:
Your family has nurtured Zee Entertainment Enterprises for the past 26 years into becoming one of India’s largest media and entertainment companies. So, how difficult was it to come to a decision to sell a significant portion of your stake in the company?
The decision was very tough, especially for the founder promoters who created this entire business. For them to come to this conclusion, I had to present really strong arguments as to why we need to do this for the betterment of the company. In this converged environment, we need solid partners to fulfil the ambition of becoming a global media powerhouse from an emerging market. Trying to do it on our own would have taken a lot of time and money, and there was no guarantee that we would have succeeded. While we offer a lot of strategic value in the Indian market to any potential overseas partner, we expect the same thing in return when they take us to the rest of the world.
Was the stake sale in the parent company the only way to achieve the objective of becoming a global media-tech company?
We have been in talks with several investors around this. Though we started with the idea of roping in a partner for Zee5 (ZEEL’s OTT video streaming platform), the fact is that Zee5 remains dependent on ZEEL for content. So, we thought it would be better to bring in a strategic partner who would have a common buy-in at the parent as well as the step-down subsidiary (Zee5) level.
If we only roped in a partner at the Zee5 level at present, and wanted to get in a strategic partner at the parent company level a few years down the line, there was no guarantee that the two partners would have alignment of purpose. So, we thought of selling up to 50% in ZEEL to a strategic global partner and offering an additional stake in Zee5 to the same partner, if it so desires.
If the Essel Group sells 50% of its holding in ZEEL, its stake will reduce to around 21%. Aren’t you concerned that by reducing your shareholding to this level, you will lose the power to block a special resolution?
Over the past five years, I don’t think we have needed to push through on any matter with the board of directors or the shareholders. We have professionally managed the company, adhering to corporate governance norms. As long as the decisions taken are above board, how does it matter what my shareholding in the company is?
I have seen a plenty of businesses being run by promoters with an economic interest of less than 20%. This is more of a mindset issue. The eventual game plan is to own a smaller share of a much larger pie.
Currently, at what stage is the stake sale process?
As of now we have expressions of interests. There are no offers on the table or any due diligence taking place. But, given the level of interest in ZEEL, our bankers and we are confident that there should be a binding deal on the table in the next five-six months.
Since this is going to be a secondary sale of the promoters’ shares, how are you going to utilise the proceeds from the transaction. There is some speculation that the liquidity from the stake sale may be utilised to pare group-level debt and revoke pledged shares?
It is correct that it is a secondary sale but not necessarily in lieu of cash. It could be a stock deal as well or some other structure.
The process of deleveraging and considerably reducing the level of pledged shares will be achieved with the sale of the group’s infrastructure assets, which is a process that will be completed much before the stake sale in ZEEL happens. The sale of the infrastructure assets should yield an equity value of around `8,000 crore at least, and that will be sufficient for the deleveraging exercise.
As far as the capital allocation needs of the group are concerned, so far, we have been leveraging liquid stocks to invest in several businesses. We want to stop that. We want to raise capital from our successful businesses and look at expansion into other verticals. While I cannot talk about what these verticals can be, they would largely be technology or media assets that will be complementary to Zee.
There is some speculation that the present stake sale plans are maybe a precursor to eventually exiting the business. Your comments.
I don’t see that happening as of today. I still believe there is a lot of value that we can build in the business. That’s why we have announced a potential divestment of only up to 50% of the promoters’ holding.