Sony calls off merger with Zee, seeks termination fee of $ 90 million

In a social media post on X, ZEEL managing director and CEO Punit Goenka, who was in Ayodhya for the ‘Pran Pratishtha’ ceremony, said “…the deal that I have spent 2 years envisioning and working towards had fallen through, despite my best and most honest efforts. I believe this to be a sign from the Lord

On Monday, Culver Max Entertainment, the owner of Sony, called off the merger agreement it had signed two years ago with homegrown media and entertainment company Zee Entertainment Enterprises Ltd (ZEEL) and also sought a termination fee of $90 million on account of alleged breaches by the company.

FILE PHOTO: Zee Entertainment and SONY logos are displayed in this illustration taken, September 1, 2022. REUTERS/Dado Ruvic/Illustration/File Photo (REUTERS)

In a note to the press, Culver Max Entertainment (CME) said that it had issued notice to ZEEL terminating the agreement dated December 22, 2021, to merge ZEEL and CME. “Although we engaged in good faith discussions to extend the end date under the merger cooperation agreement, we were unable to agree upon an extension by the January 21 deadline. After more than two years of negotiations, we are extremely disappointed that closing conditions to the merger were not satisfied by the end date.”

In a social media post on X, ZEEL managing director and CEO Punit Goenka, who was in Ayodhya for the ‘Pran Pratishtha’ ceremony, said “…the deal that I have spent 2 years envisioning and working towards had fallen through, despite my best and most honest efforts. I believe this to be a sign from the Lord.”

In its release, ZEEL said that the company held a board meeting on Monday where it took on record the communications received from Culver Max Entertainment Pvt. Ltd. (formerly Sony Pictures Networks India) and Bangla Entertainment Pvt. Ltd. (BEPL) to terminate the Merger Co-operation Agreement (MCA) dated 21st December 2021, and seeking a termination fee of USD 90 million on account of alleged breaches by ZEEL of the terms of MCA, invoking arbitration and seeking interim reliefs against ZEEL.

ZEEL denied Culver Max assertions on the alleged breaches including the claims for the termination fee. Its Board of Directors noted that all efforts and steps were taken by the company in line with the Merger Cooperation Agreement approved by its shareholders and the regulatory authorities. It added that ZEEL will take all the necessary steps to protect the long-term interests of all its stakeholders, including by taking appropriate legal action and contesting Culver Max and BEPL’s claims in the arbitration proceedings.

The termination notice was issued by Culver Max after the 30-day grace period sought by ZEEL for good faith negotiations came to an end over the weekend.

According to media analysts, the main cause of the deal falling apart was the stalemate on the choice of CEO who would lead the merged entity. Though the original agreement said that ZEEL’s Punit Goenka would lead the combined firm, differences between the two cropped up owing to the ongoing probe by markets regulator Securities and Exchange Board of India (SEBI) into Goenka’s conduct.

The Zee press note said that Punit Goenka “was agreeable to step down in the interest of the merger and proposals in this regard were discussed.” It added that ZEEL proposed an extension of a maximum period of six months for consummation of the transaction, however, Culver Max did not provide any counter proposal for extension. “These discussions did not result in any proposal from Sony but they rather have chosen to terminate,” Zee said.

“While the merger was okayed on most counts, the biggest issue was around the leadership role. This also brings us to the question of how important is corporate governance for company boards in India,” said a broadcasting sector veteran. “Sony’s stance was clear that it could not compromise on corporate governance and the SEBI probe into Goenka for diversion of funds from ZEEL and other listed companies was a deal breaker,” he said. Though SEBI’s order of barring Goenka from holding managerial positions in ZEEL and its merged entities was later overturned by SAT (Securities Appellate Tribunal), the damage had been done. “While ZEEL is saying Goenka was agreeable to step down, the courtship had probably soured and Sony decided to call off the wedding,” he said.

To be sure, if the two entertainment companies had merged, they would have created a formidable $10 billion media empire with more than 75 TV channels, two video streaming services (Zee5 and SonyLIV), two film studios and a digital content studio to take on the rivals.

Elara Capital’s media analyst Karan Taurani said the unfavourable end game in the Zee-Sony merger could give rise to more legal fights. He said that the development could lead to battle with Sony over the non-compete fee. It could also lead to legal proceedings if Zee is unable to fulfill its contract with Disney Star where it has to pay for licensing the ICC Men’s cricket rights for television. In August 2022, when Disney Star won the ICC cricket rights for the 2024-2027 cycle, in a first of its kind deal, it licensed the TV rights to Zee and kept only the digital rights with itself. Media reports suggest that Zee is yet to make payment for those rights.

“With the Sony deal off the table, Zee has to figure out a way to pay nearly $ 1.4 billion over four years for the ICC TV rights. If Sony was in the picture, it would have helped out, ” said a media industry veteran on condition of anonymity.

Taurani said, the termination of the deal will have a negative impact on both parties, as both companies are facing stiff competition from digital media and a potential threat from the proposed merger of Reliance-backed Viacom and Disney Star over the near term.

Not just that. ZEEL has reported a muted performance in terms of growth and profitability over the last two years. While its linear TV business has seen a lower growth, its OTT platform Zee5 is currently a loss-making venture, Taurani said. “We foresee valuations to be under pressure, as merger with Sony was the key driver for valuations to move up over last two years,” he added.

The broadcasting sector expert quoted earlier said that the failed deal may not have an immediate impact on the companies as both have running businesses with reasonable market shares. “However, in the longer run Zee needs to raise money as its financials are not looking good and its promoters have only 4% shareholding,” he said. They need either a strategic partner or a private equity investor for support,” he added.

In his tweet from Ayodhya, Goenka said, “I resolve to move ahead positively and work towards strengthening Bharat’s pioneering M&E Company, for all its stakeholders.”

However, the broadcast sector analyst said that consolidation following the merger would have augured well for the media industry which is highly fragmented and is seeing slow growth. “Indian market needed this consolidation because of enormous competition from platforms like Google, Meta, Netflix and Amazon. Growth will be limited if you do not consolidate. Media companies need to build additional muscle else they will not survive the onslaught of the Big Tech,” he said.

The one positive fallout of the scuttled merger is that mayhem in media sector jobs has been averted. “Mergers always lead to retrenchment. In a poor employment market like today, it is good that employees of both the companies have got a breather,” he said.