No clean break from Goenkas, yet ZEE-Sony merger is win-win for all

NEW DELHI: The ZEE-Sony merger deal makes a lot of strategic sense for both the businesses, but what it doesn't do is meet ZEE shareholders' expectations for a clean break from the Goenkas, whose corporate governance standards and opaque balance sheets were causing lot of worries.

By giving up a few more board seats, Puneet Goenka gets to keep his chair, and avoid the ignominy of being booted out of an enterprise his father founded and painstakingly built. He will continue to remain MD and CEO of the merged entity, but a majority of the board of directors will be nominated by Sony group.

Some reports suggest the Goenkas had this offer on the table even in 2019, when it opted for the Invesco deal as that allowed it to stay an independent entity with a slim chance of the promoters regaining full control if and when money comes in.

But Invesco's bold bid to oust the Goenkas from top management nudged the promoters to bring out that file and usher in Sony as a white knight.

The merger deal with Sony Pictures gives the Goenkas an option to raise family ownership in the new entity from prevailing 4 per cent to 20 per cent in the future. This itself reflects the fighting spirit of the existing promoters, who a few days ago were facing immense shareholder pressure to step down, owing to the alleged corporate governance issues.

"Effectively, Puneet finds a white knight to salvage himself from being forced to move out," said Ashwin Patil, Senior Research Analyst for the media sector at LKP Securities.

Independent analyst Ajay Bodke said this is not the best situation the activist shareholders wanted to be in. But this is the next best deal they could get.

Bodke believes even the largest ZEE shareholder, Invesco, may not oppose the deal, as the merged entity may probably beat even the leader Star in terms of market share.

He said there are two ways to look at the deal. The positive side is that a global media behemoth will be having a majority stake in ZEE with the majority of the directors appointed by it. To that extent, they will keep a hawkish eye on corporate governance.

"What was ailing the stock is a lack of adherence to high standards of corporate governance and the opaque balance sheet structure created by the current promoters. In future, there will clearly be a vigilant eye on that. Besides, investments in the unrelated ventures will hopefully unwound soon," Bodke said.

The market was excited last week following Invesco's call from CEO's ouster, as investors felt that would give a clean break from the existing promoters. But that was not to be.

"If you closely read the terms, the current promoters have retained the right to increase stake to up to 20 per cent. There will be a lot of synergies between the two. But there would not be a clean break from the promoters, as they would still be looking after day-to-day affairs. Invesco would be happy that Sony is taking over the reins. It is the next best thing that could happen," Bodke said.

Following the development, the ZEE stock soared 21.30 per cent to hit a high of Rs 310.10 on BSE.

Patil of LKP Securities said the deal may actually earn ZEE a significant re-rating. The stock last traded at 23 times FY22 and 19 times FY23 earnings.

He said Sony is strong in the Hindi GEC segment, especially in the non-fiction space, where ZEE is weak. On the other hand, ZEE is strong in movies across genres and regional GEC space, he said.

"ZEE has 18 per cent network viewership share and Sony should be 10-12 per cent in our view. Additionally, Sony is strong in Sports as well. Thus, it would be a good strategic fit from broadcast, digital and content perspective," Patil said.

In a release to stock exchanges, ZEE said the proposed merger ratio would result in 47.07 per cent of the new entity being held by ZEEL shareholders and the balance 52.93 per cent by Sony Pictures shareholders.

Vivek Menon, co-founder of NV Capital, which recently launched India's maiden media & entertainment credit fund, called it a positive development.

"This consolidation will add synergies to the existing portfolio of both the entities, especially in the sports & OTT verticals. Further ZEE would also have access to Sony's international catalogue to exploit and monetise," Menon said.

"The corporate governance overhang of ZEE should also fade away with this merger and this should enhance investor confidence. The combined entity will be in a superior position to compete with Disney more effectively, both on the distribution & advertising side. Overall, the consolidation looks value-accretive," he said.