Ten days after two of its largest shareholders sought the removal of Zee Entertainment Enterprises MD Punit Goenka, the latter has struck a merger deal with Sony Pictures Networks India that keeps him in the driver’s seat. Zee will merge with Sony Pictures in an agreement that gives the former 47% in the combined entity.
The local unit of the $85-billion Sony Corp, Japan, will own 53%. Goenka and his family, who own 3.99% in Zee, will retain their stake in the merged entity even as other Zee shareholders including Invesco Oppenheimer Developing Markets Fund and OFI Global China Fund—which sought Goenka’s ouster—will see their stakes diluted.
Deal will need assent of 75% of Zee shareholders
The Goenkas can also raise their holding to 20% in the combined entity according to the terms of the deal. The Zee-Sony merger will make the combined entity the largest entertainment player in the country, overtaking current leader Walt Disney & Star.
In a regulatory filing, Zee said: “In consideration of the existing promoters of Zee agreeing not to compete with the merged company, promoters of Sony Pictures will transfer such number of shares of the merged entity such that the (Zee) promoters will own 3.99% of the combined entity.”
It further said that the promoter family is free to increase its shareholding to 20% from 3.99% in the merged company, which will be listed on the Indian bourses. The term sheet gives a period of 90 days, during which both the parties will conduct mutual diligence and finalize definitive agreements. The proposal will then be presented to Zee shareholders.
For the deal to go through, it will need approval from 75% of Zee shareholders. It is not known what Invesco’s view is on the Zee-Sony merger.
Ten days ago, Invesco, which owns 18% in Zee, sought a special shareholder meet to oust Goenka from the board as well as appoint six nominee directors. The proposal was seen as a move to end the control of Goenka over the company, which was founded by his father Subhash Chandra in1992.
Wednesday’s development sent Zee shares soaring. The stock closed at Rs 337, up 32% on the BSE. “The corporate governance overhang of
Zee should fade away with this merger and enhance investor confidence,” said NV Capital co-founder Vivek Menon. InGovern Research Services founder Shriram Subramanian said: “With Sony as a majority shareholder and a revamped board, the combined entity would be the best solution Invesco could have hoped for. As an asset manager, it would be interested in financial returns and better governance.” InGovern had raised corporate governance concerns at Zee.
The merger will create a combined entity with revenues of Rs 13,452 crore and an employee strength of 4,600 people. The Japanese giant will infuse capital into Sony Pictures as part of the merger such that the local arm will have $1.6billion funds at closing, and will nominate the majority of the directors on the board of the combined entity.
Sony MD N P Singh will “hold a leadership role on the board” of the merged entity. Couple of years ago, Sony was looking to buy Zee but the deal fell through over valuation differences. Subsequently, it looked at a deal with Mukesh Ambani-controlled Viacom18 but this too didn’t work out.
Lawyers said though the transaction will result in a change in control, Sony will not have to make an open offer as rules exempt it for deals done via a merger. “Obtaining Zee shareholders’ approval for the merger and for the continuation of its MD at the merged entity for the next five years may entail challenges considering the current stressed relationship between certain institutional shareholders of the company and the board,” said RBSA Advisors MD Ravishu Shah.