Zee-Sony merger collapse: What it means for Indian media industry

The $10-billion deal between the two media giants comes to an end after two years of twists and turns

As the deal agreement has turned sour, brokerage firms are downgrading the stock of Zee Entertainment Enterprises. Reuters

More than two years after proposing a merger, the $10-billion deal between the Indian unit of Japan's Sony Group and media behemoth Zee Entertainment Enterprises (Zee), collapsed, leading to Zee stocks tanking about 30 per cent on Tuesday.

On Monday, Sony Group’s Indian arm, Culver Max Entertainment (formerly Sony Pictures Networks India) and Bangla Entertainment, sent a notice to Zee, calling off the deal and citing the unmet conditions of the agreed terms.

Sony also demanded a $90 million termination fee on account of alleged breaches of the Merger Co-operation Agreement, a charge that Zee has denied.

The National explains the implications of the deal’s collapse and what it means for India’s media industry.

Why did Sony terminate the deal?

The MCA between the two companies was signed on December 21, 2021. The deal was due to be completed by December 21 last year. However, Zee reportedly wanted an extension of the deadline, which was to expire on January 20. This 30-day grace period was included in the merger pact.

The deal couldn’t be finalised by January 20, 2024, and Sony cited the delay in the merger for the termination.

“Although we engaged in good faith discussions to extend the end date under the merger co-operation 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,” Sony said.

In a separate statement, Zee said it “proposed an extension of a maximum period of six months for the consummation of the transaction, however, Culver Max did not provide any counterproposal for an extension. These discussions did not result in any proposal from Sony but they rather have chosen to terminate”.

Real reason unknown

While the actual reason for Sony terminating the merger deal remains unknown at this point, Indian stockbrokers Nuvama Institutional Equities cited changes in industry dynamics such as weak profitability, a likely deal between Viacom and Disney Star and a gap in decision-making in Sony’s Japan and US offices among the significant reasons for the merger falling through.

While media reports suggested there was a dispute about the leadership of the combined entity by Zee’s managing director and chief executive Punit Goenka, Zee refuted the claims.

Sony was reportedly against Mr Goenka taking over the helm due to a regulatory investigation against him by India’s market regulator, the Securities and Exchange Board of India.

On Monday, Zee, however, clarified that Mr Goenka had agreed “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” in the best interest of Zee’s directors and shareholders.

Does anyone gain?

The deal could have helped expand Sony’s media business in the world’s most populous country, where Zee commands a major share of the media and entertainment market.

Zee currently has 1.3 billion viewers around the world through its entertainment platforms including broadcast, digital, movies, music and live entertainment.

However, with the merger falling through, the two companies could engage in a long legal battle over termination fees worth $90 million, which Sony has sought.

On Monday, Zee said it “categorically refutes all claims and assertions made by Culver Max and Bangla Entertainment regarding alleged breaches of the MCA by Zee, including their claims for the termination fee”.

“The company is evaluating all available options and basis the guidance received from the board and will take all necessary steps to safeguard the long-term interests of its stakeholders, including by taking appropriate legal action,” Zee said in a filing to the Bombay Stock Exchange, where its shares are traded.

What’s next?

Shares of Zee fell about 30 per cent to their intraday low of rupees 162.25 ($1.95) on the BSE in Tuesday's trade.

Analysts sharply cut the target price for Zee and downgraded its stock. Stockbrokers CLSA has downgraded Zee from 'buy' to 'sell' with a revised target price of 198 rupees from 300 rupees.

The merger was crucial for the survival of Zee’s business in India’s intensely competitive media industry, analysts said.

Zee’s revenue and profit growth had been muted over the past two years and the company had seen its margins erode but the merger with Sony was the major driver behind valuations moving up, said Karan Taurani, an analyst at Elara Capital.

“The failure of the Zee-Sony merger will be disappointing for shareholders – this merger had the potential to materially change industry dynamics,” said Hetal Dalal, president and chief operating officer of Institutional Investor Advisory Services.

Implications for the Indian media industry

The collapse of the deal will have adverse implications for both companies as well as on the Indian media industry, according to analysts.

“If Zee and Sony had merged, the market would have seen two big players … Consolidation has begun, and it will only gain momentum over time. It would have benefitted both Sony and Zee had they been able to work together,” said Ashish Bhasin, founder of The Bhasin Consulting Group, a business and leadership mentoring company.

Analysts see the collapse of the merger in the context of the recent announcement of a potential merger between global media company Walt Disney and Reliance Industries led by billionaire Mukesh Ambani.

Reliance Industries, through its firm Viacom 18, has around 38 channels. It also has the streaming platform JioCinema.

Disney-Star’s India business consists of a linear network of Star India and 70 television channels running in eight languages and the OTT platform Disney+ Hotstar.

“Sony which has around 7 per cent to 8 per cent market share, and Zee with around 16 per cent market share, the ideal situation would be a merger because the industry dynamics for the rest of the players are changing dramatically,” said Abneesh Roy, executive director, Nuvama Institutional Equities.

With the failed deal, both Sony and Zee could get marginalised in terms of market share, according to analysts.

If the Sony-Zee merger was completed, the combined entity would have owned more than 70 TV channels, two video streaming services (Zee5 and Sony LIV) and two film studios (Zee Studios and Sony Pictures Films India), making it the largest entertainment network in India, according to the Indian media reports.

“We believe the termination will have a negative impact on both parties, as both companies are going through stiff competition from digital media and face a potential threat from the merger of RIL/Disney over the near term,” said Mr Taurani.