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Saturday, October 23, 2021

Explained: Zee Entertainment’s merger with Sony Pictures Networks, and contours of the deal

The two companies have entered into a non-binding term sheet to combine both companies' linear networks, digital assets, production operations and program libraries.

Written by Pranav Mukul , Edited by Explained Desk | New Delhi |
Updated: September 22, 2021 2:53:58 pm
Zee-SonyWhile ZEEL has a larger network viewership share than Sony, it derives most of its strength from regional general entertainment channels (GEC) and movies, whereas Sony has a stronger foothold on Hindi GEC and sports segments.

The Board of Directors of Zee Entertainment Enterprises Ltd (ZEEL) has given an in-principle approval to the company’s merger with Sony Pictures Networks India in what could create a media combine that straddles across platforms such as cable television, digital video streaming, production operations, and music and video libraries.

What are the contours of the deal?

The two companies have entered into a non-binding term sheet to combine both companies’ linear networks, digital assets, production operations and program libraries. The term sheet provides an exclusive period of 90 days during which ZEEL and Sony Pictures Networks India will conduct mutual diligence and finalise definitive agreements.

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The merged entity will be a publicly listed company in India. Alongside the merger, shareholders of Sony will also infuse $1.575 billion in the entity, which will give Sony’s shareholders 52.93% stake in the merged company, while ZEEL shareholders will hold 47.07% of the entity. Currently, 96.01% of ZEEL shareholding is public, while 3.99% is held by its promoters.

How does ZEEL benefit from the deal?

While ZEEL has a larger network viewership share than Sony, it derives most of its strength from regional general entertainment channels (GEC) and movies, whereas Sony has a stronger foothold on Hindi GEC and sports segments.

In fact, in 2018, Zee Entertainment had sold its sports portfolio under the Ten Sports brand to Sony Pictures Networks India, along with a non-compete agreement that prevented Zee from entering the sports segment. In addition to this, analysts suggest that such a deal could help ZEEL quell some of the concerns recently raised by large shareholders pertaining to corporate governance issues with an international company like Sony getting on board.

What is in it for Sony?

Sony Pictures Networks had been on a lookout for a local partner in India to challenge the Disney-Star collaboration that has been leading the content market. The company had also been in discussions with Reliance-owned Viacom for a potential merger but the talks were called off sometime last year after the companies couldn’t agree on points such as valuation and other merger clauses.

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With the ZEEL partnership, Sony could also see some of the gaps being filled, particularly in its bouquet of entertainment channels, which have largely depended on seasonal productions such as Kaun Banega Crorepati for its success. ZEEL is present across broadcasting, movies, music, digital, live entertainment and theatre businesses, both within India and overseas, with more than 260,000 hours of television content and houses the world’s largest Hindi film library with rights to more than 4,800 movie titles across various languages, while Sony Pictures Networks India reaches out to aver 700 million viewers in India and is available in 167 countries.

Are there potential synergies in the OTT market too?

The OTT segment, which is led by American giants like Netflix, Amazon Prime and Disney+Hotstar, could see increased competition with relatively smaller players – Sony and Zee – getting together.

A report earlier this year by independent transaction advisory firm RBSA Advisors pegged the market share of Netflix and Amazon Prime Video at 20% each, followed by Disney+Hotstar at 17%, ZEE5 at 9%, and SonyLIV and ALTBalaji at 4% each. While the details of the merger are yet to be decided, including whether SonyLIV and ZEE5 will become one brand or operate separately, the combined market share of these platforms could possibly be in the running for the third place in the Indian OTT market.

Does the deal also impact Zee Group’s other corporate entities?

No, the Zee Group’s news media and education businesses are held under different corporate entities – Zee Media Corporation Ltd and Zee Learn Ltd, respectively. Both of these are listed companies and are not included in ZEEL’s deal with Sony.

According to a press release, while Sony Pictures Networks India will have a majority shareholding post-merger, by the virtue of which majority of the board of directors of the new entity will be nominated by the Sony Group, Puneet Goenka will continue to be the Managing Director and CEO of the merged entity.

The merger announcement has come close on the heels of ZEEL’s largest shareholders Invesco Oppenheimer Developing Markets Fund and OFI Global China Fund LLC seeking Goenka’s removal from the company’s board, in addition to proxy advisory firms InGovern and Investor Advisory services raising concerns around corporate misgovernance favouring the promoter family.

“Further, certain non-compete arrangements will be agreed upon between the promoters of ZEEL and the promoters of SPNI. According to the term sheet, the promoter family is free to increase its shareholding from the current ~4% to up to 20%, in a manner that is in accordance with applicable law,” the release said.

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