Zee Entertainment and Sony Pictures will merge together. In an announcement on Wednesday, the firms said they have received in-principle approval for a merger that will combine both companies’ linear networks, digital assets, production operations and program libraries.
The move to merge Zee comes at a time when the entity is engaged in a boardroom brawl with the company's two largest shareholders expressing non confidence with existing management and seeking an extraordinary general meeting to sack a few directors, including Zee's managing director and CEO Punit Goenka.
Interestingly, under the terms of the merger Goenka is expected to be MD and CEO of the new entity
"The Board has evaluated not only on financial parameters, but also on the strategic value which the partner brings to the table. The Board concluded that the merger will be in the best interest of all the shareholders and stakeholders," Zeel said in a regulatory filing.
"The merger is in line with Zeel's strategy of achieving higher growth and profitability as a leading Media & Entertainment Company across South Asia.
According to the filing, shareholders of SPNI, will hold a majority stake in the merged entity.
"The shareholders of SPNI will also infuse growth capital into SPNI as part of the merger such that SPNI has approximately $1.575 billion at closing, for use in pursuing other growth opportunities."
"Based on the existing estimated equity values of ZEEL and SPNI, the indicative merger ratio would have been 61.25 per cent in favour of ZEEL. However, with the proposed infusion of growth capital into SPNI, the resultant merger ratio is expected to result in 47.07 per cent of the merged entity to be held by ZEEL shareholders and the balance 52.93 per cent of the merged entity to be held by SPNI shareholders."
Further, Sony Pictures Entertainment, the parent company of Sony Pictures Networks India (SPNI), would invest growth capital so that SPNI has a cash balance of approximately $1.575 billion, SPNI said in a statement.
According to ZEEL, basis the existing estimated equity values of Zee Entertainment Enterprises Ltd (ZEEL) and SPNI, the indicative merger ratio would have been 61.25 per cent in favour of ZEEL.
“However, with the proposed infusion of growth capital into SPNI, the resultant merger ratio is expected to result in 47.07 per cent of the merged entity to be held by ZEEL shareholders and the balance 52.93 per cent of the merged entity to be held by SPNI shareholders,” it said.
It also added that Zee Entertainment Managing Director and Chief Executive Officer Punit Goenka, who is facing pressure from two largest shareholders of the company - Invesco and OFI Global China Fund LLC - to quit the post, would continue to lead the merged entity.
The term sheet provides an exclusive period of 90 days during which ZEEL and SPNI will conduct mutual diligence and finalize a definitive agreement.
In addition, the filing said that the merged entity will be a publicly listed company in India.
Consolidation to add synergies to ZEEL, Sony Pictures
Vivek Menon, co-founder of NV Capital, which recently launched India's maiden media & entertainment credit fund, said, "This is a positive and welcome move. After the merger talks of Sony Entertainment with Viacom18 dropping, this consolidation will add synergies to the existing portfolio of both the entities, especially in the verticals of Sports and OTT. Further, ZEE would also have access to Sony's international catalogue to exploit and monetise.
"The corporate governance overhang of ZEE Entertainment should also fade away with this merger and enhance investor confidence. The combined entity will be in a superior position to compete with Disney more effectively both on the distribution and advertising side. Overall the consolidation looks value accretive."
Ravishu Shah - Managing Director & Co-Head Valuation, RBSA Advisors.
"Merger terms envisage non-compete arrangement between the promoters of Zee Entertainment and the promoters of Sony Pictures Networks India, which will provide an incremental stake of 2.1percent to the ZEEL promoters in the merged company (indicative value of 1075+ Crore). It will be interesting to see how Regulators and Institutional shareholders respond to such non-compete arrangement with the promoters of a listed company as part of the merger process. It may be pertinent to note that SEBI Takeover code does not permit differential treatment between the promoter and public shareholders.
"Also, obtaining ZEEL shareholder approval for the proposed merger and for continuation of MD and CEO of ZEEL as the MD and CEO of the merged entity for next five years, may entail challenges considering the current stressed relationship between certain institutional shareholders of ZEEL and ZEEL Board/ Management.
"On an overall basis, the merger is expected to provide strategic synergies and the cash balance of USD ~1.57 billion of SPNI will provide growth impetus to the merged entity. Also, the proposed constitution of the Board of the merged entity (majority directors to be appointed by Sony), may help allay the concerns of certain institutional shareholders."
