Explained: Why Sony might call off the merger with Zee Entertainment

Sony-Zee merger was announced two years ago, in an attempt to create India’s largest broadcast company. Image: Shutterstock

As news of the Sony Group calling off the proposed $10 billion merger with Zee Entertainment’s India operations came out, shares of Zee Entertainment crashed by 10 percent to Rs 249 per share on January 9. However, Zee Entertainment soon issued a clarification stating the news of the Sony-Zee merger termination was baseless and factually incorrect. “Zee is committed to the merger with Sony and is continuing to work towards a successful closure of the proposed merger,” the company said in a regulatory filing today. The merger was announced two years ago, in an attempt to create India’s largest broadcast company.

So, what happened?

Sources believe that the primary point of contention revolves around the leadership of the new company, with Zee's chief executive officer, Punit Goenka, at the center of the dispute. As per the initial agreement signed in 2021, Goenka was slated to lead the merged entity.

However, recent developments have thrown a wrench into the agreed-upon leadership structure. Sony is said to be reevaluating its stance on Goenka as the CEO in light of an ongoing regulatory probe.

Last year, the Securities and Exchange Board of India (SEBI) had barred Goenka from executive or director appointments in listed companies. “There were accusations of loan recovery falsification and financial misconduct involving Zee’s founder and Goenka’s father Subhash Chandra. Sony sees this ongoing probe as a corporate governance issue,” says Abhishek Malhotra, managing partner, TMT Law Practice. The company is reportedly planning to file a termination notice to Zee by January 22, citing unmet conditions for the merger. However discussions are still ongoing between the two sides.

Why is the Sony-Zee merger important?

With Disney-Reliance conversations gaining traction, the Sony-Zee merger is extremely important for both parties, according to experts. “The potential termination of the mega-merger has significant financial implications, not only for the involved companies but also for the broader media and entertainment landscape,” explains Malhotra.

Experts don’t believe Sony will agree to Goenka leading the merged entity due to the ongoing investigation. Karan Taurani, senior vice president, Elara Capital says, “Zee has moved up 50 percent over the last one year, despite a muted financial performance largely on the back of valuation multiple re-rating due to the merger with Sony Corp. So, any potential risk of the merger getting called off by Sony will have a significant negative impact on valuations.” According to Taurani, deal conversations might continue and could go ahead without Goenka as CEO.

In case of a change in the deal terms or a new CEO for the merged company, approvals might take only a few weeks. Taurani says, “Our legal experts indicate that a fresh NCLT/CCI approval will not be needed for change in CEO of the merged company. Further, given that the NCLT/CCI approval isn’t time bound, any potential extension is unlikely to have a negative impact on the merger.”