Sony terminates merger deal with Zee Entertainment; Zee mulls legal options

The closing conditions to the merger were not satisfied by then


It is over. Sony has terminated the proposed merger agreement with Zee Entertainment, a deal that would have created a formidable broadcasting company spread across national and regional entertainment channels, sports and Hollywood content, especially from the Sony Pictures stable, along with the two streaming platforms Zee5 and Sony Liv. 

The two media companies Zee Entertainment and Culver Max Entertainment (formerly Sony Pictures Network India) had agreed to merge their operations back in 2021. 

However, Culver Max has now sent a letter to terminate the merger cooperation agreement (MCA) and also sought a termination fee of $90 million, alleging a breach of the terms of the MCA by Zee Entertainment.

"Although we engaged in good faith negotiations 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," said a statement from Sony.

The merger did not close by the end date as, among other things, the closing conditions to the merger were not satisfied by then, it added. 

The merger between the two companies would have been a win-win for both the media companies, giving the merged company a formidable position at a time when Reliance Industries has been in talks with Walt Disney to acquire the latter's India business.

Sony didn't disclose specific conditions that it says were not met. But, it is understood that differences had emerged over who would lead the merged entity. 

As per the contours of the deal that was signed between Zee and Sony two years ago, Punit Goenka, the managing director of Zee Entertainment would have led the merged entity. Should the merger have gone through, the merged entity would have had a bouquet of 76 TV channels and a market share of over 25 per cent. 

Sony officials may have had a rethink on allowing Goenka to lead the company, especially after the Securities and Exchange Board of India in June 2023 barred Goenka and Zee Entertainment founder Subhash Chandra from holding any managerial or directorial positions in Zee Entertainment for alleged siphoning of funds. 

That order was set aside by the Securities Appellate Tribunal in October. Despite this, differences remained.

Zee Entertainment has seen a sharp drop in its earnings over the last year. In the year ended March 2023, Zee Entertainment's total income declined 1.6 per cent year-on-year to Rs 8,168 crore. Net profit for the year also fell sharply to Rs 48 crore from Rs 965 crore. That also perhaps made Sony rethink the deal, some reports say.

Zee said all steps were taken in line with the MCA approved by the shareholders and regulators. It also held several "good faith negotiations" with Culver Max to consider an extension of the merger completion timeline, but that didn't materialise.

Importantly, Zee noted that Goenka was agreeable to step down in the interest of the merger and proposals in this regard were discussed, including appointing a director on the board of the merged company, protections for the conduct of pending investigations and legal proceedings and the consequent modifications to the scheme to incorporate the same. 

It has refuted the claims made by Culver Max and is evaluating all options, including taking legal recourse.

"The Board has noted that the company took all the required steps in the course of its integration journey over the last two years, to ensure that the scheme is implemented at the earliest. That said, the Board would like to assure its stakeholders that the company will take all the necessary actions, in the best interest of all stakeholders, including taking appropriate legal action and contesting Culver Max and BEPL's (Bangla Entertainment Pvt. Ltd.) claims in the arbitration proceedings," said R. Gopalan, chairman of Zee Entertainment.

Analysts have said that the inability to close the deal will be a loss for both entities.

"The potentially merged Sony-Zee entity would have been a formidable competitor to the Reliance-Disney association, given that it has fared better than the latter on most parameters. However, the stand-alone entities can be vulnerable to competition from the significantly larger entity (if the Reliance-Disney merger gets consummated)," said Pulkit Chawla, research analyst at Emkay Global Financial Services in his recent report.

 Zee's streaming service Zee5 has seen losses widen, while Sony has managed to scale its subscription video on demand (SVOD) base better, noted the analyst. But, Sony hasn't been able to achieve leadership on the linear TV side.

Zee said on Monday that it will continue to evaluate organic and inorganic opportunities for growth, leveraging the intrinsic value of its assets. 

Sony said it remains committed to growing its presence in this "vibrant and fast-growing market" and delivering "world-class entertainment" to Indian audiences.

Zee Entertainment's shares had closed down 1.6 per cent at Rs 231.75 on Saturday as investors were worried the deal was likely to be terminated. Stock markets are closed today. 

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