After nearly two years of announcing a proposal, Sony officially terminated the $10 billion media merger agreement between its Indian unit Culver Max Entertainment Ltd and Zee Entertainment Enterprises Ltd (ZEE) on Monday, 22 January.
In addition, Sony has demanded a termination fee of $90 million on account of alleged breaches of Merger Cooperation Agreement (MCA) terms by ZEE, invoking arbitration and seeking interim relief against the enterprise. Meanwhile, ZEE has refuted all the claims made by Sony.
What was the original merger deal? Why did Sony terminate the agreement? Did ZEE take any legal action? And what will be its implications? The Quint spoke to experts to weigh in:
Explained: As Sony Terminates Merger With ZEE, What Does It Mean For the Latter?
1. What Was the Original Merger Deal?
In September 2021, ZEE's board of directors gave in-principle approval of its merger with Culver Max Entertainment Pvt Ltd (formerly Sony Pictures Networks India Pvt Ltd).
The merger deal could combine the two companies' digital assets, linear networks, production operations, and programme libraries to potentially create India's largest entertainment firm.
According to a report by The Business Standard, the deal would have created a cash balance of $1.5 billion at the closing, with Sony paying a non-compete fee to ZEE founders. This would have enabled the combined company to drive content creation, strengthen its digital footprint, and pursue growth opportunities.
After the deal, Sony would have a majority stake of 50.86 percent, ZEE founders would own 3.99 percent, and other shareholders would hold 45.15 percent.
But before we go ahead, here's a brief timeline of the failed merger:
The deal was officially signed in December 2021 after a 90-day due diligence period.
It stated that the amalgamation had to be brought into effect within two years.
In February 2022, IndusInd Bank filed a plea to initiate insolvency proceedings against ZEE, alleging a default of Rs 83.08 crore.
In July 2022, Indian stock exchanges BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) approved the merger.
After a few modifications, the Competition Commission of India (CCI) approved the merger in October 2022.
In December 2022, private lender IDBI Bank moved the National Company Law Tribunal (NCLT) against ZEE, seeking an insolvency proceeding to recover Rs 149.60 crore.
In March 2023, Zee and IndusInd Bank settled their payment dispute.
In December 2023, NCLT issued notice to ZEE over petitions filed by IDBI Bank and AXIS Finance.
Sony announced its decision to terminate the merger in January 2024.
Expand2. Why Did Sony Call Off the Merger?
According to several media reports, one of the primary reasons behind the $10 billion merger being derailed was the lack of consensus over the leadership of the merged entity.
Initially, ZEE MD and CEO Punit Goenka agreed upon as the candidate; however, Sony reportedly sought a reconsideration after Goenka came under a Securities and Exchange Board of India (SEBI) probe.
In June 2023, SEBI banned Goenka and Essel Group Chairman Subhash Chandra from holding key management positions in any listed company.
Goenka's ban was overturned by the Securities Appellate Tribunal (SAT), despite a regulatory probe over allegations of fund diversion.
Sony's merger pact signed in December 2021 included a 30-day grace period for ZEE's deadline extension.
According to the terms of the merger, the deal was to be completed by 21 December 2023.
Due to the unmet closing conditions, the deal was pushed into a month-long grace period, which could not be completed by 20 January 2023, leading to Sony's termination.
Sony cited the delay as the reason for the termination of the amalgamation, stating their disappointment.
"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."
Sony said in a statement.Expand3. The SEBI Case Against Punit Goenka & Subhash Chandra
In 2023, SEBI barred Punit Goenka and Essel Group Chairman (ZEE's parent company) Subhash Chandra from holding key management positions in ZEE and its group companies. The decision came into effect after the regulator found out in the investigation that both Goenka and Chandra had diverted funds from Essel Group companies for their personal benefit.
As per a report by The Indian Express, the SEBI investigated an appropriation of certain fixed deposits of ZEE by Yes Bank for squaring off loans of related entities of Essel Group.
In September 2018, Chandra provided a Letter of Comfort (LoC) for credit facilities availed by Yes Bank, violating SEBI’s Listing Obligations and Disclosure Requirements (LODR) norms.
As a result, Chandra and Goenka were banned from key managerial positions in any company formed through a merger, amalgamation, or demerger of ZEE group companies.
Goenka later challenged SEBI's orders in court.
In October 2023, SAT set aside SEBI's order, allowing Goenka to become managing director of the company formed from ZEE and Culver Max Entertainment merger.
Expand4. Did ZEE Take Any Legal Actions Against Sony?
ZEE has denied all the assertions raised by the Japanese entertainment giant Sony Corporation about the alleged breaches under the terms of the MCA, including their claims for the termination fee. According to reports:
ZEE claims that it took all steps in line with the MCA approved by its shareholders and all regulatory authorities.
The company also mentioned that it consistently worked towards the implementation of the mentioned scheme in the interest of the shareholders.
ZEE added that it also held several deliberations and good faith negotiations with Sony with a view to considering an extension (six months) of the merger completion timeline that did not materialise.
ZEE is reportedly considering all available options and will take the necessary steps to safeguard its stakeholders' long-term interests by taking appropriate legal action and contesting Sony India's claims in the arbitration proceedings.
Expand5. Potential Outcomes of the Event
To understand the implications of the merger's termination between ZEE and Sony, The Quint spoke to Karan Taurani, Senior Vice President of Elara Capital.
According to Taurani, the termination will have a negative impact on both parties. "Both companies are going through stiff competition from digital media and face a potential threat from the merger between Reliance Industries Limited (RIL) and Disney over the near term," he added.
Stating that ZEE will continue to explore growth opportunities, leveraging its assets' intrinsic value, Taurani further shared:
"Over the near term, we foresee valuations of ZEE to be under pressure, as the merger with Sony was the key driver for valuations to move up over the last two years. With the merger being called off, the worst-case TP (transfer price) for Z could be in the range of INR 130 (including sports losses) and INR 170 (ex-sports losses, assuming ZEE does not fulfil its sports rights commitment with Disney)."
ZEE has clearly mentioned that Goenka agreed to step down in the interest of the merger, including for the appointment of a director on the board of the merged company. "Hence, the actual reason of Sony terminating the merger remains unknown," Taurani said.
However, he listed multiple legal hurdles that the termination of the deal can potentially lead to:
Battle with Sony over the non-compete fees
Legal proceedings if ZEE does not fulfil the sports contract with Disney
Ongoing legal proceedings by various creditors of the Essel group (Axis Finance, IDBI Bank etc)
Taurani further highlighted the following points about ZEE's unfavourable endgame:
1. Stiff Competition from Digital Media and RIL/Disney Merger
ZEE reported a muted profitability performance in the past two years, as its revenue growth has converged due to losses in the OTT segment and lower growth in the linear TV segment.
2. Multiple Legal Proceedings
ZEE had signed a contract with Disney for a sub-franchise of sports rights, causing estimated annual losses of Rs 15.2 billion in FY25 and beyond. This was due to high content costs, lower sports ad revenue, and cricket content being free on OTT.
"ZEE may not fulfil its commitment due to a potential contractual obligation of Rs 40 billion per year, but the absence of sports losses in FY25 and beyond could positively impact PAT (Profit After Tax)," Taurani said.
The company may face penalties and legal proceedings due to a battle with Sony over the non-compete fee, ongoing legal proceedings by creditors of the Essel group, and contract dishonouring.
3. Valuation: Downgrade to Sell
ZEE may see a significant decrease in the P/E valuation of its broadcasting business to at least 10x one-year forward or lower as a result of the merger's termination.
"This is due to converged linear TV growth, potential for scaling up the OTT offering in a fragmented market, lower profitability, and potential inventory write-offs," Taurani said.
(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)
Expand
What Was the Original Merger Deal?
In September 2021, ZEE's board of directors gave in-principle approval of its merger with Culver Max Entertainment Pvt Ltd (formerly Sony Pictures Networks India Pvt Ltd).
The merger deal could combine the two companies' digital assets, linear networks, production operations, and programme libraries to potentially create India's largest entertainment firm.
According to a report by The Business Standard, the deal would have created a cash balance of $1.5 billion at the closing, with Sony paying a non-compete fee to ZEE founders. This would have enabled the combined company to drive content creation, strengthen its digital footprint, and pursue growth opportunities.
After the deal, Sony would have a majority stake of 50.86 percent, ZEE founders would own 3.99 percent, and other shareholders would hold 45.15 percent.
But before we go ahead, here's a brief timeline of the failed merger:
The deal was officially signed in December 2021 after a 90-day due diligence period.
It stated that the amalgamation had to be brought into effect within two years.
In February 2022, IndusInd Bank filed a plea to initiate insolvency proceedings against ZEE, alleging a default of Rs 83.08 crore.
In July 2022, Indian stock exchanges BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) approved the merger.
After a few modifications, the Competition Commission of India (CCI) approved the merger in October 2022.
In December 2022, private lender IDBI Bank moved the National Company Law Tribunal (NCLT) against ZEE, seeking an insolvency proceeding to recover Rs 149.60 crore.
In March 2023, Zee and IndusInd Bank settled their payment dispute.
In December 2023, NCLT issued notice to ZEE over petitions filed by IDBI Bank and AXIS Finance.
Sony announced its decision to terminate the merger in January 2024.
Why Did Sony Call Off the Merger?
According to several media reports, one of the primary reasons behind the $10 billion merger being derailed was the lack of consensus over the leadership of the merged entity.
Initially, ZEE MD and CEO Punit Goenka agreed upon as the candidate; however, Sony reportedly sought a reconsideration after Goenka came under a Securities and Exchange Board of India (SEBI) probe.
In June 2023, SEBI banned Goenka and Essel Group Chairman Subhash Chandra from holding key management positions in any listed company.
Goenka's ban was overturned by the Securities Appellate Tribunal (SAT), despite a regulatory probe over allegations of fund diversion.
Sony's merger pact signed in December 2021 included a 30-day grace period for ZEE's deadline extension.
According to the terms of the merger, the deal was to be completed by 21 December 2023.
Due to the unmet closing conditions, the deal was pushed into a month-long grace period, which could not be completed by 20 January 2023, leading to Sony's termination.
Sony cited the delay as the reason for the termination of the amalgamation, stating their disappointment.
"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."Sony said in a statement.
The SEBI Case Against Punit Goenka & Subhash Chandra
In 2023, SEBI barred Punit Goenka and Essel Group Chairman (ZEE's parent company) Subhash Chandra from holding key management positions in ZEE and its group companies. The decision came into effect after the regulator found out in the investigation that both Goenka and Chandra had diverted funds from Essel Group companies for their personal benefit.
As per a report by The Indian Express, the SEBI investigated an appropriation of certain fixed deposits of ZEE by Yes Bank for squaring off loans of related entities of Essel Group.
In September 2018, Chandra provided a Letter of Comfort (LoC) for credit facilities availed by Yes Bank, violating SEBI’s Listing Obligations and Disclosure Requirements (LODR) norms.
As a result, Chandra and Goenka were banned from key managerial positions in any company formed through a merger, amalgamation, or demerger of ZEE group companies.
Goenka later challenged SEBI's orders in court.
In October 2023, SAT set aside SEBI's order, allowing Goenka to become managing director of the company formed from ZEE and Culver Max Entertainment merger.
Did ZEE Take Any Legal Actions Against Sony?
ZEE has denied all the assertions raised by the Japanese entertainment giant Sony Corporation about the alleged breaches under the terms of the MCA, including their claims for the termination fee. According to reports:
ZEE claims that it took all steps in line with the MCA approved by its shareholders and all regulatory authorities.
The company also mentioned that it consistently worked towards the implementation of the mentioned scheme in the interest of the shareholders.
ZEE added that it also held several deliberations and good faith negotiations with Sony with a view to considering an extension (six months) of the merger completion timeline that did not materialise.
ZEE is reportedly considering all available options and will take the necessary steps to safeguard its stakeholders' long-term interests by taking appropriate legal action and contesting Sony India's claims in the arbitration proceedings.
Potential Outcomes of the Event
To understand the implications of the merger's termination between ZEE and Sony, The Quint spoke to Karan Taurani, Senior Vice President of Elara Capital.
According to Taurani, the termination will have a negative impact on both parties. "Both companies are going through stiff competition from digital media and face a potential threat from the merger between Reliance Industries Limited (RIL) and Disney over the near term," he added.
Stating that ZEE will continue to explore growth opportunities, leveraging its assets' intrinsic value, Taurani further shared:
"Over the near term, we foresee valuations of ZEE to be under pressure, as the merger with Sony was the key driver for valuations to move up over the last two years. With the merger being called off, the worst-case TP (transfer price) for Z could be in the range of INR 130 (including sports losses) and INR 170 (ex-sports losses, assuming ZEE does not fulfil its sports rights commitment with Disney)."
ZEE has clearly mentioned that Goenka agreed to step down in the interest of the merger, including for the appointment of a director on the board of the merged company. "Hence, the actual reason of Sony terminating the merger remains unknown," Taurani said.
However, he listed multiple legal hurdles that the termination of the deal can potentially lead to:
Battle with Sony over the non-compete fees
Legal proceedings if ZEE does not fulfil the sports contract with Disney
Ongoing legal proceedings by various creditors of the Essel group (Axis Finance, IDBI Bank etc)
Taurani further highlighted the following points about ZEE's unfavourable endgame:
1. Stiff Competition from Digital Media and RIL/Disney Merger
ZEE reported a muted profitability performance in the past two years, as its revenue growth has converged due to losses in the OTT segment and lower growth in the linear TV segment.
2. Multiple Legal Proceedings
ZEE had signed a contract with Disney for a sub-franchise of sports rights, causing estimated annual losses of Rs 15.2 billion in FY25 and beyond. This was due to high content costs, lower sports ad revenue, and cricket content being free on OTT.
"ZEE may not fulfil its commitment due to a potential contractual obligation of Rs 40 billion per year, but the absence of sports losses in FY25 and beyond could positively impact PAT (Profit After Tax)," Taurani said.
The company may face penalties and legal proceedings due to a battle with Sony over the non-compete fee, ongoing legal proceedings by creditors of the Essel group, and contract dishonouring.
3. Valuation: Downgrade to Sell
ZEE may see a significant decrease in the P/E valuation of its broadcasting business to at least 10x one-year forward or lower as a result of the merger's termination.
"This is due to converged linear TV growth, potential for scaling up the OTT offering in a fragmented market, lower profitability, and potential inventory write-offs," Taurani said.
(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)