Introduction

On January 22, Sony officially ended the $10 billion media merger agreement with ZEE. Nearly two years after proposing the deal, Sony terminated the media merger agreement between its Indian unit, Culver Max Entertainment Ltd., and Zee Entertainment Enterprises Ltd. (ZEE) on Monday.

In addition, Sony has demanded a termination fee of $90 million on account of alleged breaches of Merger Cooperation Agreement (MCA) terms by ZEE, invoking arbitration and seeking interim relief against the enterprise. Meanwhile, ZEE has refuted all the claims made by Sony.

What was the original merger deal? Why did Sony terminate the agreement? Did ZEE take any legal action? And what will be its implications? What was initially poised to be a game-changing collaboration in the entertainment world has now become the talk of the town for an entirely different reason—the merger that never was.

1. Unraveling the Original Merger Deal

• In September 2021, ZEE's board of directors gave in-principal approval of its merger with Culver Max Entertainment Pvt. Ltd. (formerly Sony Pictures Networks India Pvt. Ltd.). The proposed merger had the potential to bring together the digital assets, linear networks, production operations, and program libraries of both companies, aiming to establish India's largest entertainment firm.
• As per the Business Standard report, the agreement was projected to generate a closing cash balance of $1.5 billion, accompanied by Sony disbursing a non-compete fee to ZEE founders. This financial structure would have empowered the merged entity to enhance content creation, fortify its digital presence, and actively pursue avenues for growth.
• Post-merger, Sony was slated to hold a majority stake of 50.86%, ZEE founders would retain 3.99%, and other shareholders were anticipated to own 45.15% of the combined company.
• Top of Form

But, before we proceed, let's explore a concise timeline of the failed merger:

• The merger deal, officially signed in December 2021 after a 90-day due diligence period, mandated the implementation of the amalgamation within two years.
• In February 2022, IndusInd Bank filed for insolvency proceedings against ZEE, citing an alleged default of Rs 83.08 crore.
• Approvals from Indian stock exchanges BSE and NSE were secured in July 2022, and after some modifications, the Competition Commission of India (CCI) greenlit the merger in October 2022.
• Private lender IDBI Bank initiated insolvency proceedings against ZEE in December 2022, seeking to recover Rs 149.60 crore. The payment dispute between ZEE and IndusInd Bank was resolved in March 2023.
• By December 2023, the National Company Law Tribunal (NCLT) had issued notices to ZEE in response to petitions filed by IDBI Bank and AXIS Finance. However, Sony's decision to terminate the merger was announced in January 2024.

 2. Decoding the Merger Breakdown: Why Sony Called Off the Deal

• According to several media reports, one of the primary reasons behind the $10 billion merger being derailed was the lack of consensus over the leadership of the merged entity.
• At the outset, ZEE MD and CEO Punit Goenka were initially agreed upon as the candidates. However, reports suggest that Sony reconsidered this decision after Goenka became the subject of a Securities and Exchange Board of India (SEBI) probe.
• In June 2023, SEBI imposed a ban on Goenka and Essel Group Chairman Subhash Chandra, prohibiting them from occupying key management positions in any listed company. But Goenka's ban was overturned by the Securities Appellate Tribunal (SAT), despite a regulatory probe over allegations of fund diversion.
• The merger agreement between Sony, signed in December 2021, incorporated a 30-day grace period for ZEE's deadline extension. Originally slated for completion by 21 December 2023, the deal faced unmet closing conditions, prompting an extension into a month-long grace period. However, the process could not be finalized by 20 January 2023, ultimately resulting in Sony's decision to terminate the merger.
• Sony has officially announced the termination of the amalgamation, citing the reason as the delay in the process. Expressing disappointment, the company stated that despite engaging in good-faith discussions to extend the end date under the merger cooperation agreement, an agreement on an extension could not be reached by the January 21 deadline. After more than two years of negotiations, Sony expressed extreme disappointment, noting that the closing conditions necessary for the merger were not satisfied by the specified end date.

3. Unraveling the SEBI Case: Allegations Against Punit Goenka and Subhash Chandra

• In 2023, SEBI prohibited Punit Goenka and Subhash Chandra, the Chairman of Essel Group (ZEE's parent company), from occupying key management positions in ZEE and its affiliated companies. The regulatory action was initiated following an investigation revealing that both Goenka and Chandra had diverted funds from Essel Group companies for personal gains.
• According to The Indian Express report, SEBI conducted an investigation into the misappropriation of specific fixed deposits of ZEE by Yes Bank, utilized to settle loans associated with entities belonging to the Essel Group.
• In September 2018, Subhash Chandra violated SEBI’s norms by providing a Letter of Comfort for Yes Bank's credit facilities. Consequently, Chandra and Punit Goenka were barred from key managerial roles in any ZEE group-related merger. Despite the ban, Goenka contested SEBI's orders. In October 2023, SAT overturned the decision, allowing Goenka to become managing director in the merged entity of ZEE and Culver Max Entertainment.

4. Legal Responses: ZEE's Actions Amidst the Sony Merger Fallout

ZEE has denied all the assertions raised by the Japanese entertainment giant Sony Corporation about the alleged breaches under the terms of the MCA, including their claims for the termination fee. According to reports:

• ZEE asserts that it has undertaken all necessary measures in accordance with the Ministry of Corporate Affairs (MCA), as approved by its shareholders and all regulatory authorities.
• The company also mentioned that it consistently worked towards the implementation of the mentioned scheme in the interest of the shareholders.
• ZEE further stated that it engaged in multiple discussions and conducted good-faith negotiations with Sony regarding the potential extension (six months) of the merger completion timeline, which ultimately did not materialize.

5. Anticipated Impacts: Potential Outcomes Following the Sony-ZEE Merger Fallout

• The termination of the merger is expected to adversely affect both Sony and ZEE, as noted by industry observers. In the face of intense competition from digital media and the looming threat from the Reliance Industries Limited (RIL) and Disney merger, the fallout has raised concerns for both entities in the short term.
• ZEE, however, has affirmed its commitment to seeking growth opportunities by capitalizing on the intrinsic value of its assets. Despite this setback, the company acknowledges potential challenges in terms of valuation. The terminated merger, which was a key driver for ZEE's valuations over the past two years, is likely to exert downward pressure.
• In light of the development, industry experts suggest a worst-case transfer price for ZEE ranging from INR 130 (including sports losses) to INR 170 (ex-sports losses, assuming ZEE does not fulfill its sports rights commitment with Disney). The intricacies behind Sony's decision to terminate the merger remain undisclosed, with ZEE emphasizing that Goenka's agreement to step down was in the interest of the merger and the subsequent directorial appointments on the merged company's board.

Conclusion

The Sony-Zee merger, once poised to be the Bollywood blockbuster of corporate collaborations, has ended up as a tale of unfulfilled expectations. As the dust settles on this unexpected turn of events, the media industry is left to speculate on the future trajectories of Sony and Zee. The failed merger serves as a reminder of the complexities that can arise in the business of entertainment, where even the most promising partnerships may crumble under the weight of diverging visions and strategies.

References

1. https://www.thequint.com/explainers/explained-as-sony-terminates-10-billion-merger-with-zee#read-more
2. https://www.indiatoday.in/business/story/zee-sony-merger-approved-check-key-details-shareholding-road-ahead-1890678-2021-12-22