Sony cancels $10 billion merger with Zee and pursues $90 million termination fees. ICCBizNews

Sony Corp terminates the $10 billion merger between its India unit and Zee Entertainment Enterprises due to unmet conditions. Disagreements over leadership and a regulatory investigation against Zee's proposed MD Punit Goenka caused the deadlock. Sony seeks $90 million in termination fees and invokes arbitration. Zee refutes the claims and plans to take legal action. 

After two years of stalled negotiations, Sony Corp of Japan officially called off its proposed $10 billion merger with Zee Entertainment Enterprises in India on Monday. Sony's 62-page notice terminating the merger coincided with Zee's request for an extension of the deal deadline. While Sony attributed the termination to unmet merger conditions, the main point of contention has been the leadership of the combined entity. Zee suggested Punit Goenka as the head, but Sony objected, citing a regulatory investigation against him. Sony preferred its nominee, N P Singh, as the leader. Seeking $90 million in termination fees for breaches of the merger agreement, Sony has initiated arbitration. Zee has denied all of Sony's claims and announced plans to take legal action against Sony while contesting the allegations in arbitration proceedings. The breakdown of the merger is anticipated to have adverse effects on both Sony and Zee.

Merger talks collapse amid market disruption

The collapse of the SonyZee merger negotiations comes at a time when the market is going through digital disruption and consolidation, where Reliance Industries’ Viacom18 and the India unit of Walt Disney are planning a merger.

“After more than two years of negotiations, we are extremely disappointed that closing conditions to the merger were not satisfied... We remain committed to growing our presence in (India’s) vibrant and fast-growing market,” said Sony. It, however, didn’t specify what conditions were unfulfilled. Sony further said that even after the two-year deal timeline ended on Dec 21, 2023, it was engaged in “good faith discussions” with Zee for 30 days to make the merger effective but both “were unable to agree upon an extension by the Jan 21 deadline”.

Zee said Goenka had agreed to step down in the interest of the merger and had discussed the appointment of a director on the board of the combined company. It further said it had proposed “protections for conduct of pending investigations and legal proceedings in the best interest of its directors and shareholders”.

Zee also said that it had requested Sony to extend the merger deadline by six more months after the 30-day grace period lapsed. However, Sony “did not provide any counter proposal for extension”, it said. “These discussions did not result in any proposal from Sony but they rather have chosen to terminate,” it stated. Goenka, who was in Ayodhya for the Ram temple ceremony when he received the message that Sony had called off the deal, posted on X that he sees the development as “a sign from the Lord”, adding that he would move ahead positively and work towards strengthening Zee for all its stakeholders.

Markets regulator Sebi is conducting investigation against Goenka for alleged diversion of funds from Zee to promoter entities. A final order is yet to come. Earlier, Sebi had barred Goenka from holding directorships in any listed entity. But Securities Appellate Tribunal reversed the interim order and directed Sebi to complete the investigation.Zee, which spent Rs 176 crore on merger-related expenses in FY23, said it will continue to “evaluate organic and inorganic opportunities for growth, leveraging the intrinsic value of its assets”.

Zee is contending with falling profits and cash reserves in a highly competitive market where streaming majors such as Netflix and Amazon Prime are fighting for share. “With the merger terminated, Zee’s valuation will slump back to 12 times its price to earning (PE) levels seen prior to the merger announcement,” foreign brokerage CLSA said. “The stock had derated in the past during the promoter share pledging crisis (in 2019) and fall in business cash conversion. We downgrade Zee from buy to sell on a revised target price of Rs 198 (prior price was Rs 3 00).”