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Zee crisis: Is the ongoing merger between Subhash Chandra-led entertainment company and Sony in jeopardy?

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For 72-year-old Subhash Chandra, facing challenges is a way of life. From blocking Rupert Murdoch’s takeover bids in the late 1990s to founding the ill-fated rebel cricket league ICL, the homegrown entrepreneur best known as the founder of Zee TV may have remembered It is not clear how many people there are. He has faced it. Although he lost a majority stake in Zee Entertainment Enterprises Ltd (or ZEEL, which had revenues of Rs 817 crore in FY23) and the crown jewel of its Essel group, he was mostly unscathed No injuries.

The current challenge, however, is quite different. He is dealing with a series of serious allegations surrounding corporate governance by the capital markets regulator, the Securities and Exchange Board of India (Sebi). This will test the mettle of Chandra and his son Puneet Goenkar, who will have to draw wisdom from many battles to meet this challenge. For someone who came into television broadcasting without a business background and started an empire, the competition came from multiple quarters and did take its toll, but Chandra managed to hang on. The ability to think outside the box served him well early on. Did it help him this time?

Subhash Chandra, Chairman Emeritus, Zee Entertainment Enterprises

hard times

For ZEEL, the temporary order from Sebi on June 12 was a bolt from the blue. ZEEL is in the process of merging with Sony Pictures Networks India (now known as Culver Max Entertainment) (more on that later). Reference to an issue dating back to September 2018, alleging that Chandra and his son Goenka (ZEEL Managing Director and CEO) abused their board positions as directors/key executives of ZEEL “for their own misappropriation of funds for the benefit” and are barred from holding directorships in listed entities. This is significant as Goenka will serve as managing director and CEO of the combined entity following the Zee-Sony alliance.

Punit Goenka, Managing Director and CEO, Zee Entertainment Enterprises

What is the root of the problem? For Chandra, now chairman emeritus of ZEEL and chairman of the Essel Group, early forays into infrastructure resulted in a highly leveraged balance sheet. ZEEL stock was pledged, and over time his holding in the company declined. In November 2019, two independent directors, Neharika Vohra and Sunil Kumar, resigned, following Sebi’s order, the former said in his resignation letter, “During the meeting on October 17, 2019, the matter was disclosed by a letter from the board of directors from Information about banks receiving guarantees to subsidiaries without board approval. Operations team treats this matter very casually.” This concerns a Rs 200 crore loan from YES Bank to Essel Green Mobility and associated entities, which is based on Chandra Letter of Comfort (LoC). The lender (YES Bank) “has adjusted Rs 200 crore Zee fixed deposits to meet the obligations of the seven entities” (the interim order treats them as joint venture entities). Essel Green Mobility is one of these seven companies; the others are Pan India Infraprojects, Essel Corporate Resources, Essel Utilities Distribution, Essel Business Excellence Services, Pan India Network Infravest and Living Entertainment Enterprises (see chart “Merry Go Round”).

But what does Ethel Green Mobility do? Acuité Ratings & Research’s April 15, 2019 credit rating report on the company said its business model is divided into two main verticals: transportation solutions and energy storage. “In terms of transportation solutions, Essel Green Mobility will develop a network of electric tricycles (cars) and electric buses through which it will have a fleet of these vehicles. In the energy storage vertical, it plans to partner with a multinational company to produce Lithium Ion Battery.”

Shriram Subramanian, founder and managing director of corporate governance consultancy InGovern Research Services, said the bigger issue has to do with the RBI’s guidelines. “A bank, in this case YES Bank, provides loans to promoters of non-listed companies based on guarantees and letters of comfort from listed companies. This is flawed because listed companies are not wholly owned by the promoters. In this case No, YES Bank knowingly extended the loan based on the letter of comfort from Chairman Zee.”

The father and son immediately appealed the Sebi order to the Securities Appeals Tribunal (SAT). After hearing from lawyers representing Sebi and ZEEL promoters, the tribunal on June 27 reserved its order, while lawyers for Chandra and Goenka sought a stay of execution. From a legal point of view, there are now countless possibilities. Avanti T. Chandele, partner at law firm Mind Legal, said Sebi’s interim order shows that it has found substantial evidence of alleged misconduct or breach of regulations. “Challenging the order by appeal is ZEEL’s only viable legal option,” she said. Along the way, the suspension will allow the company to continue operating unaffected by any restrictions. “Having said that, it is worth noting that this does not mean that the underlying charges are absolved, but merely provides temporary relief while the legal proceedings continue.”

merge and more

How did the merger happen? In mid-2021, ZEEL was locked in a battle with Invesco, an Atlanta-based investment management firm that holds an 18% stake in the company. These allegations are serious and, again, relate to ZEEL’s poor corporate governance. Against this backdrop, ZEEL’s board caught the market off guard by approving the merger of Sony Pictures Networks India with itself in an announcement to the stock exchange in the third week of September. The combined entity (with Goenka at the helm) would have revenue of $1.79 billion, making it the second-largest entertainment network after Star Disney. Zee-Sony will have a total of 75 channels, two OTT platforms and two studios, with a strong presence in different genres such as entertainment and sports, as well as regional markets. “I told Sony what happened [referring to Invesco] And leave the decision up to them,” Goenka told Business Today earlier this year. ZEEL did not respond to BT’s inquiries for the report.

The current legal battle has raised questions about the fate of the merger. However, Vivek Menon, managing partner at media and entertainment credit fund NV Capital, sees no impact because it is between two organisations. “Let’s not forget that in the past year, there have been many stumbling blocks such as NCLT (National Company Law Tribunal) issues, but neither side has given up. The Competition Commission of India has also expressed support for the deal,” he said. ZEEL also doesn’t want a protracted battle in court; its stock price has fallen since the merger was announced (see chart “Highs and Lows”) after an initial surge.

Vivek Menon, Managing Partner, NV Capital

For Sony, growth has been challenging since it ceded the media rights to the then-Indian Stars in late 2017 for the Indian Premier League. In FY2022, its total revenue stood at Rs 6,771 crore, up 20% from FY2021, and net profit surged 60%; however, profits were little changed compared to FY2020.

“This merger is a win-win situation for both parties. Joining forces is the only way to take on Viacom18 and Disney Star in broadcast and Netflix and Amazon in OTT,” Menon said. InGovern’s Subramanian said the Sebi order does not imply ZEEL as a company. “Without Goenka in the MD role, there would be no pressure on the process. The opportunity for Sony is huge, and past issues should have come up in due diligence anyway.”

Meanwhile, on June 21, a statement from Sony headquarters referred to “several media reports on the future of the planned merger after Sebi’s order” and said: “We take Sebi’s interim order very seriously and will continue to monitor the Developments at Sony. Deal.” This succinct statement from Sony is open to multiple interpretations.

Shriram Subramanian, Founder and Managing Director, Ingovern Research Services

Experts say the OTT business requires heavy investment, especially when competitors have deep pockets. “A merger of this size gives them the ammunition to retain and potentially grow their subscriber base, and coupled with the capital injection from Sony’s parent company, they have a great opportunity to strengthen their OTT content,” Menon explained. As part of the deal, Sony’s parent company will inject $1.5 billion into the combined entity, in addition to its 50.86 percent majority stake, with ZEEL shareholders owning just over 45 percent. Only 4% of ZEEL promoters. Crucially, a lot of time and effort went into this merger, with teams at both ends strategizing for the combined situation. “It’s a big ask now to unwind and start all over again. Right now, both organizations need to come together to stay relevant and find ways to grow their market share,” he added.

From a legal point of view, however, the bigger issue concerns Chandra and Goenka. “ZEEL’s shareholders approved the merger as they knew that Goenka would be part of the new entity. As circumstances have changed, they can decide to reconsider the decision. However, this must be done through the NCLT as this tribunal needs to re-examine the ZEEL shareholders any decision taken,” said Ashish Kumar Singh, managing partner at law firm Capstone Legal. Of course, time is limited as industry dynamics (especially the increasing OTT) change. Additionally, working while the law is up in the air creates uncertainty.

Broker analysis reflects this. BofA Securities has a “no rating” rating on ZEEL in a June 19 note as it awaits word on whether the merger will go through. It details how the company’s fundamentals have deteriorated due to three factors. One is weak business momentum, with revenue growth expected to remain slow due to slower advertising and subscriptions. It then pointed to Sebi’s ongoing investigation as an outstanding issue of corporate governance. “Most recently, Sebi said Zee’s promoters diverted funds from listed entities and banned Punit Goenka from board/top management positions in listed companies, which may prevent him from being CEO of a merged Zee-Sony entity. The third factor is the risk of mergers, with Bank of America saying, “The bullish case for Zee is that after a merger with Sony, corporate governance and business momentum will improve with the involvement of Sony’s management.” This puts the merger with Sony at risk when the order is given. “

Even die-hard optimists will admit that there is a lot at stake in this long battle, and that any conclusive results look set to take a while.

@krishnagopalan

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