Sony Pictures on January 22 terminated the $10-billion merger deal with Zee Entertainment Enterprises Limited.
In a notice issued to Zee, Sony called off the December 22, 2021 agreement to merge ZEEL and Culver Max Entertainment Private Limited (CME), which was formerly known as Sony Pictures Networks India Private Limited.
"Although we engaged in good faith discussions to extend the end date under the merger cooperation agreement, we were unable to agree upon an extension by the January 21 deadline. After more than two years of negotiations, we are extremely disappointed that closing conditions to the merger were not satisfied by the end date," the statement said.
Sony's statement pointed out that the definitive agreements provided that if the merger did not close by the date some 24 months after their signature date, the parties would be required to discuss in good faith an extension of the end date required to make the merger effective by a reasonable period of time. Such discussions were required to be held for a period ending 30 days after the end date. The definitive agreements further provided that if the parties are unable to agree upon such an extension by the end of the discussion period, any party could terminate the definitive agreement by providing a written notice.
The merger did not close by the end date as, among other things, the closing conditions to the merger were not satisfied by then.
Sony has not included the impact of the merger in its consolidated financial results forecast for the fiscal year ending March 31, 2024, which was announced on November 9, 2023, and does not anticipate any material impact on its consolidated financial results because of the termination of the $10-billion merger deal, the company said.
“We remain committed to growing our presence in this vibrant and fast-growing market and delivering world-class entertainment to Indian audiences,” it added.
Zee denies Sony allegations
Zee in a statement said that Sony is seeking a termination fee of $90 million on account of alleged breaches by ZEEL of the terms of MCA (Merger Co-operation Agreement), invoking arbitration and seeking interim reliefs against ZEEL.
It categorically denied all the assertions raised by Culver Max and BEPL (Bangla Entertainment Pvt Ltd) on the alleged breaches under the terms of the MCA, including their claims for the termination fee.
The Board of Directors of Zee noted that all efforts and steps were taken by the company in line with the merger cooperation agreement, approved by its shareholders and all regulatory authorities. ZEEL’s Board of Directors is evaluating all the available options. "Basis the guidance received from the Board, ZEEL will take all the necessary steps to protect the long-term interests of all its stakeholders, including by taking appropriate legal action and contesting Culver Max and BEPL’s claims in the arbitration proceedings," the company said.
Moneycontrol had on January 21 reported that a clutch of institutional investors, including Life Insurance Corp of India (LIC), owning more than 23.5 percent of Zee Entertainment Enterprises Ltd (ZEEL), wrote to the markets regulator that the merger stalemate was hurting minority shareholders.
Zee had inked the merger agreement with Culver Max and BEPL on December 21, 2021. The merger scheme was approved by the Mumbai bench of the National Company Law Tribunal (NCLT) on August 10 and 11, 2023, respectively.
"Under the MCA, ZEEL exercised its right to require Culver Max and BEPL to enter into negotiations for a period of 30 days to arrive at a mutual agreement on the extension of the end date by a reasonable period of time for completion of the transaction as per the terms of the MCA. During this period, despite conducting numerous deliberations, the parties failed to arrive at a consensus on the purported pending conditions precedent that required action on the part of both ZEEL and Culver Max, BEPL under the terms of the MCA," Zee said in a release.
It added that its MD and CEO Punit Goenka was agreeable to step down in the interest of the merger and proposals in this regard were discussed, including for appointment of a director on the Board of the merged company, protections for conduct of pending investigations and legal proceedings in the best interest of ZEEL directors and shareholders and the consequent modifications to the scheme to incorporate the same.
"ZEEL proposed an extension of a maximum period of six months for consummation of the transaction, however, Culver Max did not provide any counter proposal for the extension. These discussions did not result in any proposal from Sony but they rather have chosen to terminate."
Bone of contention
Zee had sought more time to resolve the issue of whether Goenka would helm the combined entity, a clause that is part of the signed merger deal. While Sony initially agreed to have him as the leader of the merged entity, it reversed its stance after a regulatory probe against him.
In June last year, Sebi alleged that Zee was engaged in deceptive practices by falsely claiming the recovery of loans to hide private financing deals linked to chairman and promoter Subhash Chandra. In an interim order, the regulator stated that Chandra and his son Goenka misused their positions and diverted funds. As a result, Goenka was prohibited from holding executive or director positions in listed companies.
Goenka was, however, reinstated as the managing director of ZEEL on October 30 after the Securities Appellate Tribunal overturned the ban imposed by Sebi.
Impact of merger termination
The termination of the merger deal is likely to have a negative impact on both the companies, as Zee and Sony are going through stiff competition from digital media and face a potential threat from the merger of RIL and Disney in the near term, said Karan Taurani, senior vice-president of Elara Capital.
He added that Zee reported a muted performance in terms of growth and profitability over the last two years, as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin dipped to 10.2 percent in the nine months of FY24 due to losses in the OTT (over the top platform) segment and because of lower growth in linear TV segment.
Zee may also not be able to fulfil its commitment for the contract signed with Disney for sub-franchise of sports (ICC tournaments) right on linear TV.
"The company has a cash balance of a mere Rs 600 crore, versus a potential contractual obligation of Rs 4,000 crore per year as the above was a strategic decision which could reap benefits due to Zee and Sony merger. There could be a negative impact of a penalty or legal proceedings on the above for Zee. However, PAT (profit after tax) will see a positive impact due to absence of sports losses in FY25 and beyond," Taurani added.
There is also some likelihood of the top five shareholders owning 30 percent of Zee put together, who may work together to do the deal with Sony and without Zee CEO Punit Goenka, the analyst added.
"However, the process is time-consuming which may take around 6-12 months and may lead to multiple legal hurdles between the promoter and institutions," Taurani added.
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