Mega Merger of Zee and Sony Boosts Investor Sentiment. Stock Jumps 30%

Sony Pictures Networks India signed a non-binding deal to buy the country's largest publicly-traded television network Zee Entertainment Enterprises, a move that came after Zee shareholders sought removal of key officials.

Zee Entertainment (ZEE) share price surged more than 30% on the BSE in early trade today post the deal announcement.

Note that top investors such as Invesco have been pressuring ZEE, which last week requested the ouster of three of its directors from the board, including CEO Punit Goenka.

The removal was seen as a move to end the sway of founder Subhash Chandra's family over the company founded in 1992, and which was once Rupert Murdoch's Indian partner.

Earlier, corporate governance bodies InGovern and Investor Advisory services had also raised concerns around corporate misgovernance favouring the Chandra family.

Key details of Zee-Sony merger

Zee Entertainment will hold 47.07%, while Sony India will hold a majority stake of 52.93% in the merged company.

Majority of the board of directors of the merged entity will be nominated by the Sony Group.

The shareholders of Zee and Sony have entered into a non-binding term sheet to combine both companies' linear networks, digital assets, production operations, and program libraries.

Both companies have agreed to a 90-day contractual exclusivity period. During this period they will finalise definitive agreements. The merged entity will be a publicly listed company.

Post the merger, Sony will infuse growth capital into the company as part of the merger such that Sony Pictures and Network has about US$1.6 bn, for pursuing other growth opportunities.

The final transaction would be subject to completion of customary due diligence and execution of definitive agreements and required corporate, regulatory, and third party approvals, including the votes of Zee's shareholders.

Who will lead the merged entity?

As part of the transaction, Puneet Goenka will continue to remain the Managing Director and CEO of the merged entity.

Punit Goenka is the son of Essel group founder and chairman Subhash Chandra.

The Subhash Chandra family owns 4% of the company as it had to sell their stake to pay off the debt worth Rs 130 bn taken by promoter entities after defaulting.

According to the term sheet, the promoter family is free to increase its shareholding from the current 4% to up to 20%, in a manner that is in accordance with applicable law.

Also, Invesco Developing Markets Fund and OFI Global China Fund LLC hold about 17.9% stake in the network.

To know more, check out Zee Entertainment's latest shareholding pattern.

Management's comment

In a statement, Zee said its board has evaluated the merger not only on financial parameters, but also on the strategic value which Sony brings to the table.

The board concluded that the merger will be in the best interest of all the shareholders & stakeholders.

The merger is in line with Zee's strategy of achieving higher growth and profitability as a leading media and entertainment company across South Asia. The board has authorised the management of Zee to initiate the required due diligence process.

R Gopalan, Chairman, Zee Entertainment Enterprises said,

• The board of directors at Zee have conducted a strategic review of the merger proposal between Sony and Zee.
  
  As a board that encompasses a blend of highly accomplished professionals having rich expertise across varied sectors, we always keep in mind the best interests of the shareholders.

Zee Entertainment and Sony Network's Presence in India

The two companies together will create largest entertainment network in India with 26% viewership share with Zee having 18% viewership share and Sony having 8% share.

In addition, Zee has a presence in over 173 countries and a reach of more than 1.3 bn people around the globe and reaches over 600 m individuals in India every week.

Sony reaches over 700 m viewers in India and is available in 167 countries.

Also, both Zee and Sony have made progress in the over-the-top (OTT) world with platforms like ZEE5 and SonyLIV.

Sony's success across entertainment genres (including gaming and sports), combined with Zee's strong expertise in content creation and deep consumer connect established over the last three decades, will add significant value to the merged entity.

Equitymaster's view on the merger

We reached out to Richa Agarwal, Senior Research Analyst at Equitymaster, and editor of the smallcap recommendation service, Hidden Treasure, for her view on the merger.

Here's what she has to say,

• In our view, the deals will be synergistic for both the companies. The infusion of growth capital and change in ownership is a positive and could ease market concerns on corporate governance issue front.
  
  However, we would like to wait for a definitive view until the details of the deal are finalized and it gets approved.
  
  One should also consider that the proposed deal suggests that the key management will remain the same. Mr Punit Goenka will continue to be the managing director and CEO of the merged entity despite shareholders' pressure to step down.
  
  Further, as per the terms, the current promoters could increase its shareholding from the current 4% to up to 20%. Given the corporate governance standards and quality of financials in the past, the lack of a clean break warrants a close monitoring on these aspects.

How the stock markets reacted to Zee Entertainment

Shares of Zee Entertainment opened the day at Rs 281.2 on the BSE and Rs 281.3 on the NSE.

Its share price closed at Rs 337 (up 31.9%) on the BSE and Rs 336.8 (up 31.7%) on the NSE.

At its current price, it is trading at a P/E of 32.1.

The share touched its 52-week high of Rs 355.4 and 52-week low of Rs 166.8 on 22 September 2021 and 26 August 2021, respectively.

Over the last 30 days, the Zee Entertainment share price is up 90.6%. Over the last one year, the company's share price is up 54.4%.

About Zee Entertainment

Zee Entertainment Enterprises (ZEE), part of the Essel group, is a worldwide media & entertainment company with presence across more than 170 countries.

The company is among the largest global content companies across genres, languages, and platforms. It is present across broadcasting, movies, music, live entertainment, and digital business both in India and overseas.

Its portfolio consists of more than 41 channels in 9 languages and has rights to more than 4,200 movie titles.

For more details about the company, you can have a look at Zee Entertainment's factsheet and quarterly results on our website.

For a sector overview, read our media sector report.

You can also compare Zee with its peers.

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