The calling-off of the Zee-Sony merger may mark the end of a deal but its ramifications go far beyond, affecting markets, individual companies, other M&A (merger and acquisition) deals in the space, and the broader media landscape in the country. And it doesn’t look like the dust will not settle anytime soon for either Sony Pictures Networks India Private Ltd or Zee Entertainment Enterprises Ltd, said experts.
“The merger fallout will most likely result in complex cross-border disputes across India and Singapore. On the one hand, Sony may be keen to approach the Singapore International Arbitration Centre (SIAC) and invoke arbitration against Zee, expeditiously seeking to constitute an arbitral tribunal and perhaps even seek interim measures to protect the $90-million demand (as termination fees) besides any other damages related claims,” said Pranav Vyas, partner, DSK Legal, who is also a white-collar crime and international commercial arbitration expert.
On the other hand, according to Vyas, Zee may explore implementation of the merger, which was approved by the Mumbai bench of the National Company Law Tribunal (NCLT) recently.
Read More: ZEE’s Punit Goenka: Sony ran out of patience
“Zee will also have multiple contests at hand, including the challenge to the merger by its financial creditors before NCLAT (National Company Law Appellate Tribunal), as well as contesting potential arbitration proceedings in Singapore,” he added.
Two days after Sony sent the termination notice, Zee approached NCLT seeking directions to implement the merger scheme and initiated legal action in arbitration proceedings at the SIAC.
The NCLT had approved the merger on August 10, 2023, after closely examining its legality and feasibility as well as its impact on the industry and stakeholders.
The journey to the falling apart of the $10-billion merger first announced in December 2021, aimed to combine the strengths of two prominent players in the media and entertainment segment, has not been an easy one.
Just days after the NCLT approved the merger, the Securities and Exchange Board of India (SEBI) issued an order that prevented Zee managing director and CEO Punit Goenka and his father Subhash Chandra from assuming any significant management roles in Zee companies or the newly-merged entity.
Read More: Punit Goenka addresses Zee employees; ensures no layoffs due to failed merger
However, complications did not end there. The Securities Appellate Tribunal (SAT) on October 30 overturned SEBI’s decision prohibiting Goenka from holding any managerial position in listed companies for a year.
But by then, Sony had changed its mind about honouring one of the most important conditions of the deal, which was to put Goenka at the helm of the merged company, and instead had intended that its own executive, NP Singh, for the role.
In a recent interview with The Economic Times, Chandra cleared the air about the leadership tussle. According to him, the proposed leadership was not the reason behind the merger falling through.
“As the founding family, we wrote to them (Sony) and we had decided that even if Sony is demanding Punit’s separation, we will agree to it but let us at least meet once. But they even refused to give me time for a meeting to close this discussion. So if shareholders think that Sony would agree to the merger if Punit stepped aside, it is ill-founded.” ET quoted Chandra as saying.
So why did the merger not happen?
“Maybe Sony ran out of patience,” Goenka said in a townhall meeting addressing 3,000 Zee employees on January 25.
While there is a lot of speculation around the real reason, Sony in a regulatory filing said that “the closing conditions to the merger were not satisfied”.
However, Zee in an official statement said that it categorically denies all the assertions raised by Sony of the alleged breaches under the rules of the Ministry of Corporate Affairs.
With the crux of the matter being the alleged failure of Zee Entertainment Enterprises to comply with the terms of its merger deal with the Indian subsidiary of Sony Group, earlier set to be completed by end of 2023, Sony has now initiated a comprehensive legal action against Zee.
Read More: Zee shareholders seek transparency on merger fallout with Sony
What next?
“Zee has responded with a double-edged legal strategy by firstly moving the NCLT for directions on how to carry out the merger and by secondly moving the SIAC denying Sony’s claims. This could lead to incongruous reliefs being granted which may complicate the dispute and make the legal battle a long-drawn one,” said corporate law expert Aditya Gauri. Gauri is a partner at law firm Aeddhaas Legal.
According to Gauri, what needs to be seen now is whether or not the NCLT finds it within its jurisdiction to give any directions to enforce the merger, especially since one could argue that the dispute is primarily contractual and, thus, outside the purview of NCLT, leaving the SIAC as the only forum for resolution.
“An amicable settlement at this stage seems unlikely since the merger was in the works for almost two years before falling apart, and the acrimony and devaluation of the target company resulting therefrom,” said Vyas.
There is the likelihood of legal proceedings being pursued before multiple fora in coming months. According to Vyas, this could include jurisdictional challenges to cross-border disputes, emergency arbitrator proceedings under SIAC rules, enforcement of and/or challenge to the resultant ad-interim arrangements, if put in place by the emergency arbitrator.
Impact on the shares
“With a few run-ins with SEBI last year in connection with allegations of fund diversion, the present collapse of the merger deal only increases the challenges for Zee. The shareholders and investors of Zee are particularly anxious since the hopes of capital infusion by Sony have now evaded Zee’s investors,” Gauri said.
Zee shares have indeed been plummeting. On January 19, two days before the extended deadline of the merger Zee ended, the stock went up to Rs 244.95. After the termination news became public, it touched a low of Rs 159. In the past one month alone, Zee shares have seen a 43.36 percent drop.
Market experts, though, are bullish about the stock.
“Zee is considered a sound buy fundamentally, with a positive revenue model. From a long-term perspective, we anticipate minimal damage. The current sentiment shift is nothing but a temporary setback. We recommend clients to adopt cautious long positions initially, with the possibility of becoming more aggressive after two to three quarters,” said Brijesh Ail, head, technical and derivatives, at IDBI Capital Market and Securities Ltd.
According to Ail, the recent decline also stems from leveraged positions taken in Zee’s stock before the news surfaced. Simply put, the concept of leverage in the stock market refers to borrowing money to invest in more stock than one can afford on one’s own.
Naturally, investors were interested in the stock given all the hype about the merger.
Stakeholder moves
Meanwhile, a group of Zee shareholders, including foreign portfolio investors, mutual funds and retail investors, has reportedly written to the company, seeking transparency regarding the events leading to the termination of the merger with Sony Pictures Network.
As per experts, shareholder consent by majority is necessary for any merger or amalgamation. Having approved the merger by majority, Zee’s shareholders may therefore seek to inspect the termination letter if it is sought to be withheld by the company. If the termination letter is not already in the public domain, shareholders will be entitled to inspect the same (unless such access to commercially sensitive information by shareholders is restricted under the articles of association).
“Typically, shareholders in Indian entities do not take precipitate action. However, large institutional investors may seek redressal under Indian law owing to adverse financial implications of such a large and relevant merger fallout,” explained Vyas.
Impact on ad land
Industry executives said that advertisers maintained a subdued enthusiasm for the Zee-Sony merger, with media buying agencies not expecting any significant boost in ad revenue even if the merger went through.
While acknowledging the potential potency of Zee’s regional strength and Sony’s mainstream appeal, experts contend that the impact on ad revenue remains uncertain especially in the current media landscape where advertisers are all moving their ad rupees to digital.
“With limited advertising budgets and the dominance of sports channels in revenue streams the merger might not have substantially elevated overall ad revenue for Zee and Sony,” said a media buyer who did not wish to be named.
“So it is business as usual for advertisers,” the person said.