A game of bluff scuttled Sony-Zee's plans to create $10 bn media giant

By Anto Antony

In November, Sony Group Corp.’s lawyers got a nasty surprise during a routine call from the legal team of Zee Enterprises Entertainment Ltd.
 

Nearly two years into tortuous merger negotiations to create a $10 billion Indian entertainment giant, Zee wanted the Japanese company to agree to a so-called “hold harmless” clause for its Chief Executive Officer, Punit Goenka, just weeks before the Dec. 21 deal deadline.

Already wary of Goenka, who had been accused of financial impropriety by India’s markets regulator several months earlier, Sony executives wondered why he requested indemnity.

On his part, Goenka was worried that Sony would start a witch hunt against him after the merger was completed and it got what it wanted: access to Zee’s deep library of local entertainment content.

The account of this weeks-long stalemate was pieced together by speaking to people familiar with the matter who asked not to be identified as the talks were private.

Goenka was refusing to relinquish the CEO role of the merged entity, and Sony no longer was willing to move forward with him at the helm. By Jan. 19, when Sony’s board members met in Tokyo, the deal was dead in the water. A 62-page termination letter was sent to Zee on Jan. 22, citing non-fulfillment of some pre-requisite conditions outlined in the merger pact.

Disproportionate Influence 
 

The aborted deal underscores the challenges facing foreign companies attempting to crack the biggest entertainment market in Asia. A culture gap and the disproportionate influence that India’s founding generation of company honchos still wield over their companies continue to stymie those wanting access to a $25 billion market.

“Cross-border transactions in India represent a challenge, mostly stemming from differences in corporate culture, accounting practices and reporting standards,” said Utkarsh Sinha, managing director at Bexley Advisors, a Mumbai-based boutique investment bank. “There’s a bridge to cross,” but also a “pot of gold” in the form of the Indian demographic, he said.

Representatives for Sony and Zee didn’t immediately respond to emailed requests for comments on issues that scuppered the deal.

While Sony’s India head sought to rally the morale of his employees in a letter Wednesday, it was thin on details on how it plans to fend off rivals. Walt Disney Co. is talking to Reliance Industries Ltd. to combine its India operations, creating India’s largest entertainment company.

With Sony and Zee’s collapse, the Reliance-Disney entity “will have all the might in the market,” said Karan Taurani, analyst at Elara Securities India. “They will become the preferred platform for advertisers and content creators, which in turn will give them pricing power in the market.”

Miffed Bosses
 

Sony bosses in the US and Japan were also miffed when Zee made an exchange filing on Dec. 17 seeking a deadline extension without any conversations with them, another person familiar said.

The tiff started soon after Securities and Exchange Board of India, or Sebi, said in June that Goenka and his father, Subhash Chandra, had “abused their position” and siphoned off funds “for their own benefit.” The regulator also barred them from holding any executive or director positions in listed firms while its investigation was underway. 

In October, an appellate authority gave partial relief to Goenka from Sebi’s ban, allowing him to hold these positions during the probe. 

Zee saw this appellate win as a green-light for Goenka to be CEO of the merged entity, but Sony disagreed.

The tycoon offered to be the interim CEO while a search committee could be instituted to scout for another candidate, according to people familiar with the matter, but Sony now wanted to appoint N.P. Singh, its head of India operations, as CEO.

Game of bluff
 

The months that followed were like a game of bluff.

Goenka expected Sony to relent since Zee’s was the only sizeable media asset in the market that could bolster the Japanese company’s less than 10% market share. Zee, with 17% share in Indian television market, has a rich library of regional language content and dozens of local television channels. 

Sony expected Zee to blink given its deteriorating financial health — profit for the year ended March 31 dropped 95% — and the debts Chandra and Goenka needed to pay off. Also, with the founders only holding a 4% stake in Zee, Sony hoped that larger shareholders would prevail upon Goenka to step aside.

Read More: Zee Extends Slump to 25% as Sony Scraps Merger Deal: Street Wrap

After the deal was called off, Zee’s stock nosedived 30% during trading in Mumbai Tuesday and at least ten brokerages, including CLSA, downgraded recommendations on the stock. Some investors could still be hoping to revive the deal.

“There is also some likelihood of the shareholders - top five owning about 30% put together — who may work together to do the deal with Sony” without Goenka, Elara’s Taurani said.

White Knight Sony
 

It’s not Goenka’s first rodeo.

Funds managed by Atlanta-based Invesco Ltd., once Zee’s biggest shareholder with an 18% stake, had also waged a fight in 2021 to remove Goenka from the board and as CEO, saying the company’s founders were enriching themselves at the expense of ordinary shareholders. 

Ironically, Sony was Zee’s white knight then and its merger deal helped calm down Invesco, which has since pared most of its stake in the Indian company. 

Since mid-December, Goenka has been holding closed-door meetings at his 16th floor office in the central district of Mumbai with his key lieutenants including Shyamala Venkatachalam and Vikas Somani, according to people familiar with the matter. Zee’s legal advisor for the deal was also contacted several times. 

Unlike his father who was known for angry outbursts, soft-spoken Goenka has looked calm and unflappable to those who met him or spoke to him in the days leading up to the termination.

In fact, on Jan. 22 — the day he received the termination notice and exactly 25 months to the date the merger was announced — Goenka was in the holy city of Ayodhya, as a VIP guest of the Indian government that was inaugurating a new temple. 

In a post that day on X, formerly known as Twitter, Goenka wrote that the Sony deal going kaput was “a sign from the Lord.”