Lessons to learn from sudden end of Sony-Zee mega serial

Zee must navigate repayments to stave off a potential encounter with the National Company Law Tribunal. If Zee enters the NCLT, will Sony submit a bid?

The recently terminated business merger between Zee and Sony resembled a meticulously planned arranged marriage. But it had the events unfolding with subsequent allegations against one of the parties. While one party patiently sought clarity, eventual disillusionment led to the abandonment of the proposed union.

The Sony-Zee agreement sought to create India's premier entertainment company, poised with the financial prowess to rival global giants such as Netflix and Amazon. Furthermore, it aimed at being a significant competitor in the Indian market against Viacom (Reliance), currently in a non-binding agreement with Disney to form a joint venture.

The agreement signed in December 2021, held significant importance for the survival of both companies within the world's fastest-growing large economy. Zee's corporate governance came under scrutiny, particularly following the unprecedented promoter share pledging crisis in 2019. During this crisis, Zee promoters (the Essel Group) repaid loans through multiple stake sales, causing the promoter's shareholding to plummet from 42 per cent to 4 per cent. Sony resisted the demand from Zee's Chief Executive, Punit Goenka, who faced a Sebi investigation for regulatory-allegations, to continue in his role after the merger.

Strategic withdrawal

Evaluate the timing of your exit.

Did Goenka overestimate his negotiating position? Was his insistence on greater control over the entity or the Managing Director role a tactical move? Given the myriad issues, ranging from shareholders' distrust to regulatory and lender concerns, the Goenkas should have exercised caution and refrained from pushing the boundaries, considering they stood to lose more than Sony.

In an ideal scenario, a domestic entrepreneur might rightfully seek a control premium or an additional ‘will handle Indian turf’ premium from a foreign partner, but Zee's complex situation did not warrant such assertiveness.

Patience has boundaries

Will this discourage future Foreign Direct Investment (FDI) in this sector? Unlikely. The assessment of this deal needs a distinct perspective. Sony, with its longstanding presence in India, would have secured the second-largest viewership share after Jio-Disney through the Zee deal. Despite the termination, Sony can redefine its strategy with available alternatives. However, the road ahead is likely to be more challenging for Zee.

Perils of debt over diminishing equity value

Beware of the dangers of accumulating debt over declining equity value. Debtors knocking at the door, Zee must navigate repayments to stave off a potential encounter with the National Company Law Tribunal (NCLT). If Zee enters the NCLT, will Sony submit a bid? What about other Indian behemoths such as Jio, Adani, Birlas, or Goenka of CESC? Could Indian conglomerates view acquiring Zee as a domestic protective strategy?

Non-promoter shareholders also wield influence. Market speculation suggests that major investors might convene an Extraordinary General Meeting (EGM) to oust Goenka as CEO. If this scenario unfolds, Goenka stepping down from the CEO role, possibly to Sony, could have, in theory, concluded the transaction amicably.

Strings attached to stress-bailouts

Beware of entanglements in stress-induced bailouts.

One faction asserts that Punit Goenka agreed to step down as CEO for the greater good of shareholders in the Sony merger, while Sony contends otherwise. The reality likely lies somewhere in between.

While Goenka has successfully built a formidable business, navigating company turnarounds demands distinct skill sets, emphasising the crucial role of trust from stakeholders and boards. Without capital or debt, businesses flounder, a stark reality for Zee. Even if an Indian business leader comes to Zee's rescue, it won't be without intricately tied strings and knots.

Timely action in business turnarounds

Swift action is paramount in a business turnaround narrative. Zee's prolonged state of distress has eroded shareholder trust, constituting a significant void. The Goenkas find themselves on the losing end due to this trust deficit.

If Zee opts for legal recourse against Sony, the stakes rise. Engaging in an unrestrained legal battle could amplify the unresolved issues for Zee — ranging from debtors and regulatory clashes with Sebi to the prevalent lack of trust among shareholders — all unfolding simultaneously.

Conclusion

As the Indian media and entertainment sector expands amid the growth of the country's consumption economy, traditional media models face obsolescence, if not already in a profound state of decline, evident in the struggles of many traditional media houses. Surviving and maintaining relevance in this evolving landscape necessitates significant financial capital directed towards technological investments. Notably, industry giants like Reliance and Adani are actively channelling more resources into this domain.

Traditionally, owning media assets was associated with political or public influence. However, with technological disruption, this paradigm has shifted — mere ownership of media assets no longer guarantees political sway. Zee's Subhash Chandra has been a non-conformist, steering his own path to elevate Zee from its scratch-to-sky. The tougher question ahead: Can his son continue this narrative on a grander scale, or will they face the prospect of losing Zee? The answers to these questions will unfold in the months ahead.

(Srinath Sridharan is a policy researcher and corporate adviser. X: @ssmumbai.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.