Investor activism to decide fate of Zee-Sony merger


By Nikita Periwal

MUMBAI – The letter sent to Zee Entertainment Enterprises Ltd by its largest institutional investor Invesco Oppenheimer could mean that the former's plan to merge with Sony Pictures Networks India turns out to be a protracted affair.

US-based Invesco Oppenheimer had last week asked the board of Zee Entertainment to convene an extraordinary general meeting of shareholders to appoint six new independent directors and remove Punit Goenka as the chief executive officer and managing director. Two other directors, whose removal was sought, have already resigned.

The Board's Apparent Reluctance To Remove Goenka As The CEO And Managing Director May Not Go Well With Institutional Shareholders.

However, Zee Entertainment's board today unanimously approved a plan to merge the company with Sony India, with Sony getting majority stake in the merged entity, and Goenka continuing as the chief executive officer and managing director.

The existence of a demand by a shareholder and the board's apparent reluctance to remove Goenka as the chief executive officer and managing director may not go well with institutional shareholders, who had sought his removal on grounds of corporate governance lapses, some analysts said.

"...continuance of Punit Goenka as MD, for next 5 years, does make the management concerns to remain," brokerage firm said in a note.

Analysts alluded to the fact that Zee Entertainment reaching out to arch rival for a merger could have been driven more by the need to ensure Goenka stays in office and the group gets an opportunity to up its stake in the merged entity to a significant 20%. Promoters currently own 4% in the company.

To put things in perspective, when Invesco Oppenheimer had sought the ouster of three directors, including Goenka, the shares of Zee Entertainment had surged as this was seen helping the company be run professionally, which would be more suited to minority shareholders.

As much as 57.5% of Zee Entertainment is held by foreign portfolio investors and the company's corporate governance issues, ranging from inter-corporate deposits, inexplicable advances paid for acquiring content, and pledging of shares by promoters, would not sit well with them.

Investors are bound to ask questions to the board about the deal being approved even when a key shareholder demanded the ouster of the MD, CEO. It was not immediately clear whether the board had responded to Invesco's letter.

"...obtaining ZEEL shareholder approval for the proposed merger and for the continuation of MD and CEO of ZEEL as the MD and CEO of the merged entity for the next five years may entail challenges...," said Ravishu Shah, the managing director at RBSA Advisors, an independent transaction advisory firm.

This is because of the current stressed relationship between certain institutional shareholders of Zee Entertainment and its board and the management, Shah said.

The deal itself is non-binding with an exclusive 90-day period, where both the companies will conduct due diligence.

Even with these concerns, shares of Zee Entertainment rose today as some believe that Goenka staying on will be beneficial for the company in the near term as it gives continuity to the business.

Shares of Zee Entertainment today jumped up 39% to their highest level in nearly two years. This was after the stock surged as much as 60% last week, with several brokerage firms already upgrading the stock to factor in benefits of the likely merger.

This optimism is not without reason.

After seeing its market share slip and advertising revenues weaken, a merger with Sony India will be a shot in the arm for Zee Entertainment. Sony India will infuse capital in Zee Entertainment; more importantly, most members on the board of directors of the merged entity will be appointed by Sony India, reducing further risk to corporate governance.

This merger, if it goes through, will effectively see India's entertainment market dominated by two players – the combined entity of Zee Entertainment and Sony India, and Star India.

A new board of directors is likely to review the company's aggressive investment for content, which has hindered the generation of free cash flow and led to a jump in working capital. The board will address any perceived leakage from the balance sheet, Axis Capital said in a recent report.

Sony's strong foothold in sports and the Hindi general entertainment space will complement Zee Entertainment's strength in regional genres, which is less or absent for Sony. The merged entity will also have a diverse offering for their over-the-top platform, Elara Securities said.

While digital offerings will need to be reinvented, distribution of content as a combined entity will also give the company a better bargaining power, the brokerage firm said.

The proposed merger is a structural change for Zee Entertainment and warrants a significant re-rating even after the current surge in share price, analysts said. Shares of Zee Entertainment have jumped up over 72% after Invesco Oppenheimer demanded an ouster of directors last week.

While Angel Broking recommended investors to be 'cautious', Elara Securities said that there was a possibility of an 80-100% upside 'at least'.

Zee Entertainment will hold a call with investors at 1730 IST today, where it is expected to explain the rationale of the deal. Today, its shares ended nearly 32% higher at 336.80 rupees on the National Stock Exchange.  End

Edited by Mainak Moitra

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