What next for Zee Ent: The answer will only unfold in the coming months

Punit Goenka sounds tired. The managing director and chief executive officer (CEO) of Zee Entertainment Enterprises was talking on its third quarter earnings call on Tuesday this week. It has been three weeks since Culver Max Entertainment (earlier Sony) issued a notice to terminate the merger agreement the duo signed in December 2021. For more than two years, everything that one of India’s largest broadcasters was doing – from shutting businesses in Russia or Thailand or channels like Big Magic and Big Ganga – was to meet regulatory approvals and the ‘conditions precedent’ to the merger. All the effort and expense now lies in legal tatters.

Goenka talks of a three-pronged strategy of “frugality, optimisation, and sharp focus on quality content to bring back our margins to industry-beating levels and drive growth for the future.” This basically means cost-cutting. Zee has delivered gross profit margins between 25-30 per cent over the years. As they fall (See chart) Goenka’s immediate concern is to get them back to 18-20 per cent by 2026.   

But just getting margins back to 20 per cent does not address the real, structural changes in the market that made this merger imperative. That is the reason the Zee stock has been battered on the bourses in spite of being an attractive media company.

Why Sony ditched and what now?

The real conundrum facing traditional media companies globally is the stagnation in their main business and the flow of audiences and revenues to the tech-media giants. Google, with revenues of $278 billion in the financial year ending September 2023, uses search and YouTube as the glue to keep audiences. The $127 billion Meta uses socialising to keep them coming to WhatsApp, Facebook or Instagram. For the $554 billion Amazon, its video business is simply a carrot to get people to buy mire. In this club of firms with revenues of over $100 billion where do legacy media companies fit? They have only two choices – sell out or scale up. That is why there has been a wave of consolidation across media globally. That is why the Sony-Zee merger was important.

It could have created a Rs 14,851 crore or $1.8 billion (FY2023 revenues) firm. The merged company would have been India’s fourth largest media company after Google, Meta and Disney-Star. All regulatory formalities and paperwork for the merger were complete. In August 2023 came a Securities and Exchange Board of India (SEBI) order barring Goenka from holding key position in the company pending an investigation into a fund diversion. In October, a Special Appellate Tribunal reinstated Goenka, though the SEBI investigation is pending. This, say people close to both firms, is when Sony’s attitude changed.

The chief financial officer, chief compliance officer, company secretary and general counsel of the merged company would have been Culver Max appointees given it was going to be a majority shareholder (51 per cent). Five of the nine board members would be nominees of shareholders of Culver Max. Of the remaining four, one was Goenka and three would be independent. Reports suggest that when Culver Max started wrangling about making current India CEO, N P Singh, the head of the merged company, Goenka agreed to step down and look for an alternative, provided the merger was consummated. Could he, however, retain his seat as a director on the board? That, many believe, led to the final break.

Both Sony and Zee have refused to talk about the merger. During the earnings call, Goenka declined to answer any detailed questions except to say that, “As a member of the founding family (his father Subhash Chandra set up Zee TV in 1992), we wanted the merger to be implemented. That is why we divested from several businesses, closed some of our international markets.” Zee has filed an application before the National Company Law Tribunal, Mumbai, seeking directions to implement the merger. It is also contesting Sony’s demand for a $90 million termination fee.

The legal wrangles notwithstanding, what happens to Zee? Will existing shareholders including the Goenka family do a buyback? Will it find a partner in Reliance, the Adani Group or any other firm? How long can an institutionally held firm, run by a member of the founding family that owns just about 4 per cent, survive as a standalone? The answers to these questions will only unfold in the coming months.