Sony Calls Off $10 Billion Merger With Indian TV Giant Zee Entertainment Enterprises

Sony Group Corporation has ended its more than two-year attempt to merge its TV and streaming businesses in India with local giant Zee Entertainment Enterprises Limited (ZEEL).

In a statement, issued Monday, Sony Group said: “The merger did not close by the end date as, among other things, the closing conditions to the merger were not satisfied by then. [Sony Pictures Networks India] has been engaged in discussions in good faith to extend the end date but the discussion period has expired without an agreement upon an extension of the end date. As a result, on January 22, 2024, SPNI issued a notice to ZEEL terminating the definitive agreements.”

A separate statement from Sony in India struck an angrier tone. “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,” it said. “We remain committed to growing our presence in this vibrant and fast-growing market and delivering world-class entertainment to Indian audiences.”

Sony Group’s statement also said that it “does not anticipate any material impact on its consolidated financial results as a result of the termination of the definitive agreements for the merger.” But it seems likely that there could still be some price to pay.

Sony may have had to pay Zee a $100 million termination fee as part of the original agreement, but this may no longer be the case as the penalty cause has expired. But there is still the risk that they could be sued by Zee or its shareholders. Meanwhile, according to a statement from ZEEL, Sony is seeking a termination fee of $90 million, “on account of alleged breaches by ZEEL of the terms of [merger cooperation agreement], invoking arbitration and seeking interim reliefs against ZEEL. ZEEL categorically denies all the assertions raised by [Sony vehicles] Culver Max and BEPL on the alleged breaches under the terms of the MCA, including their claims for the termination fee.”

“ZEEL’s Board of Directors is evaluating all the available options. Basis the guidance received from the board, 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 statement added. “ZEEL has displayed utmost commitment towards the merger by undertaking several permanent and irreversible steps, resulting in one time and recurring costs for ZEEL. Despite this, the company will continue to evaluate organic and inorganic opportunities for growth, leveraging the intrinsic value of its assets.”

The combination of ZEE and Culver Max Entertainment, formerly Sony Pictures Networks India, would have been worth $10 billion and put more than 70 linear TV channels, two video streaming services (ZEE5 and Sony LIV) and two film studios (Zee Studios and Sony Pictures Films India), under a single roof. That would have made it the largest player in the country’s still significant linear TV market and bolstered its position in the Indian streaming sector where consolidation is now under way.

The deal was first proposed in 2021 and formalized in December that year, ahead of a process of regulatory and other approvals. The timeframe set by the two companies for completion of the deal expired on Dec. 21, 2023, but was extended by a month.

The deal was eventually approved by fair trade regulator CCI, stock markets NSE and BSE, shareholders and creditors of the company and the Mumbai bench of the National Company Law Tribunal.

During the time that the approvals process rumbled slowly forwards, India’s stock market regulator the Securities and Exchange Board of India (SEBI), separately, published a scathing investigative report that accused Zee founder Subhash Chandra and CEO and MD Punit Goenka of running the company for their own gain and “siphoning off” funds. Goenka, who was to have been the lead operational executive at the merged Sony-Zee business, was banned from holding executive office at any listed company from August.

Though the decision to ban him was reversed on appeal in October, allowing Goenka to take up the leadership role, Sony was understood to be deeply uncomfortable with him in that position, as it may have violated Japanese corporate governance standards. Moreover, in India MD and CEO N.P. Singh, Sony has an able and highly-respected replacement waiting in the wings.

Singh’s elevation may anyway have been on the cards, after an initial period of grace for Goenka. The merger terms saw Sony hold the majority of the enlarged group’s equity (51%) and nominate the majority of its board of directors.

Over the weekend Indian media carried reports that some of ZEE’s institutional shareholders were preparing to appeal to regulators in India asking for the removal of Goenka arguing that his continued presence and protracted negotiations were destroying shareholder value.

The Monday statement issued by ZEEL states that Goenka “was agreeable to step down in the interest of the merger and proposals in this regard were discussed, including for appointment of a director on the Board of the merged company, protections for conduct of pending investigations and legal proceedings in the best interest of ZEEL’s directors and shareholders and the consequent modifications to the scheme to incorporate the same.”

Possibly just as important as the leadership disagreement in Sony’s decision not to proceed with the deal was the issue of Zee’s valuation.

While Zee’s revenues have been flat at some INR80 billion ($960 million) annually for the past five years, profits tumbled from INR9.65 billion ($120 million) in the year to March 2022 (the figures closest to the time when the deal was struck) to just INR478 million ($6 million) in the year to March 2023. Zee’s current fiscal year also began with a quarter of loss.

Those difficulties have been reflected in its share price which has dropped by 25% from INR371 on Dec. 10, 2021, to INR248 on Jan. 19, 2024. Its early January market capitalization of INR223 billion, or $3.68 billion, compared badly with a nearly $5 billion valuation implied by the deal terms.

Following the deal cancelation news, Zee shares sank by a further 6% in early Monday trading on the Bombay Stock Exchange and the NSE, featuring around INR231 apiece.

While the economies of scale, cost savings and increased advertising market muscle that the enlarged group may have enjoyed could two years ago have justified the original deal price, it is not clear that current market dynamics still favor that analysis.

India’s TV sector has rebounded after dipping during the COVID pandemic, but it is not growing rapidly and new threats have emerged. Disney’s market leadership through the Star pay-TV operation and the Disney+ Hotstar streaming platform are under challenge from Amazon’s Prime Video and Reliance Industries’ Jio, a fast-expanding phones-broadband-entertainment behemoth. Industry gossip now points to Reliance striking a deal to buy much of Disney’s India operations within the next month.

All those factors would seem to make walking away from a deal with Zee – with its inflated price tag and toxic management – a relatively easy decision for the Japanese group.

Walking away, however, means that Sony still needs to either sell or scale-up its Indian TV business. Its options are unclear.

Sony may now be hoping to shake loose some of the bits that regulators want carved off from the combined Jio-Disney venture. Or it could return with a fresh – and possibly hostile – takeover offer for the weakened ZEE.