Daybreak - Could the now dead Zee-Sony deal resurrect?

Episode Date: January 24, 2024

From giving an extra month for “good-faith” negotiations a little over two years ago, to accusing Zee of breach of contract…the Sony Zee merger deal has seen its fair share ups and downs. It was supposed to be the country’s biggest entertainment merger worth $10 billion—two media behemoths were coming together. Now though, the deal is buried six feet under. On Monday, Sony officially released a statement announcing the termination of the agreement. The next day, Punit Goenka, Zee’s CEO, was seen attending the Ram temple inauguration in Ayodhya where he told media: “I believe this to be a sign from the Lord. I resolve to move ahead positively and work towards strengthening Bharat’s pioneering M&E Company, for all its stakeholders."  Sony, meanwhile, not only ended the deal, it also sought $10 million in damages on account of alleged breaches by ZEE. And to make matters worse, Zee shares have fallen by over 30 percentHow did things get here and what's next?Tune in**CORRECTION The host mistakenly said Sony is seeking $10 million dollars in damages on account of alleged breaches by ZEE instead of $90 million. The error is regrettedDaybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.   

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. From giving an extra month to complete the deal over good fate to accusing Z of breach of contract, the Sony Z merger deal has seen its fair share of ups and downs. Or should I say mostly downs. I think it's okay to say that because now the deal is buried six feet under. It was supposed to be

the country's biggest entertainment merger worth $10 billion. Two media behemits were coming together. Now, if you're a regular listener of Daybreak, you might remember sometime last month I told you how the deal might not come through after all. Now it is official. On Monday, Sony officially released a statement announcing the termination of the agreement. The next day, Punit Goinka, Z's CEO, was seen attending the Ram Temple inauguration in Ayodhya, where he told the media, and I'm quoting, I believe this to be assigned from the Lord. I resolved to move ahead positively and work towards strengthening Bharat's pioneering media and entertainment company for all its stakeholders. End quote. Sony, meanwhile, not only ended the deal, it also sought

$10 million in damages from Z on account of alleged breaches. And to make matters worse, Z shares have fallen by over 30%. How did things get to this point? Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Da Sharma, and I don't chase the news cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Wednesday, the 24th of January.

It all started when Puneid Goenka, the CEO of Z, wanted to lead the merged entity. And this was supposedly crucial for Z because all important managerial positions were already under the control of Sony under the terms of the agreement. The chief financial officer and the company secretary would also be nominated by Sony. The thing is, though, that Goenka was actually the original choice. for the top job. But then news broke that he, along with his father Subarz Chandra, the founder of Zee, were being investigated by Sebi or the Securities Exchanges Board of India. For what? Sebi accused the father-son duo of siphoning off funds from Z, which is a public company. The investigation is still ongoing. Initially, Sebi had barred Chandra and Goenka

from holding any key managerial position in any company that would be found. by a way of a merger or amalgamation and demurger of Z group of companies. Goinka had later challenged Sebi's order. And then a ray of hope came in October last year when the securities appellate tribunal or SAT set aside Seby's order. This meant that Goenka could, after all, lead the company formed after the merger. But Sony was obviously concerned. The Japanese company did not want anything that could potentially become

an even bigger scandal. So Goenka then offered to step down in the interest of the merger. Also, let us not forget the regulatory and legal hurdles that came in the way of the deal. The approval from the CCI or the Competition Commission of India came quite late. But Zee needed this deal badly. It needed a night in shining armor to come and save it. Its ad revenue was not growing despite FMCG companies spending more on ads. and also its OTT arm Z5 kept suffering from more and more losses.

And then Sony came along and promised to infuse capital and take a controlling interest in the company. It was a fantastic offer for Z and also a great opportunity for Chandra to rebuild some of his falling stake in his own company. Sony had plans to invest more than $1.5 billion in the merged entity. And the Chandra family was free to increase its share. share holding by almost five times to up to 20%. But it all fell apart and now Zee's annual profit has fallen to just $6 million, which is a 95% drop in a span of a year. It owed Disney $200 million out of a $1.4 billion fee earlier this month.

It was for TV rights of cricket matches. Zee had made the deal thinking that the Sony merger would come through. But that, as we know, didn't happen. so it ended up not paying saying it was suffering from a liquidity crunch. Now that the transaction is dead, Z may find it hard to make money from advertising during cricket season this year. So, as you can tell, things are not looking too good for Z at this point. Like I said, its shares have already fallen by over 30%. So, what is next? Stay tuned to find out.

To begin with, Z has refuted all claims and has said that it will take necessary steps, including taking legal action against Sony. The company has said that it is evaluating all available options and based on the guidance received from the board, it will take all the necessary steps to safeguard the long-term interest of its stakeholders. But guess what? It is possible that the merger might resurrect. Sony could still acquire Zee with or without the father-sand-doer.

You see, Subhash Chandr. and his family together own just less than a 4% stake in Z. Now, many board members have been denied reappointments by shareholders who, after this deal is officially off, will be upset. And they could actually come together to get rid of the founders and sell the company. In fact, some of Z's institutional investors, including LIC, who own more than 23% of Z together, have already written to Seby saying that this, whole event is hurting minority shareholders.

The investors, which also include ICICI prudential, Nipin India, among others, are also thinking of an alternative merger plan in case CEO Puneid Goenka declines to step down. A source who is aware of the whole situation told Money Control that, and I'm quoting, the fund's plan to call for an extraordinary general meeting to seek the removal of Goenka and some other directors. And while all of this goes down, guess who is coming for the top position in the Indian media space? Mokesh Ambani, of course. Ambani's Wicom 18 Media is in talks with Disney Star to join forces.

Had the Z-Soni merger come through, it would have made for a solid rival and it would be a healthy market. Instead, reliance in Disney Star, if they come together, will own broadcast and streaming licenses for nearly every cricket tournament. in India. And advertisers will have no option but to do business with them and only them. And that could turn out to be expensive. Meanwhile, Reliance literally sells everything from food and clothes to telecom and fuel. So imagine how easy it would be for it to promote its own product. Daybreak is produced from the Newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters,

subscriber-only apps and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.