What does the Zee merger with Sony mean?

Indian Market
by 5paisa Research TeamLast Updated: 2022-12-09T08:53:22+05:30

A few days after Zee Entertainment investors tried to oust Punit Goenka from the top job at the
company, Zee has announced a strategic merger deal with Sony Pictures Network India Ltd. The
combined entity created through the merger of Zee Entertainment and Sony Pictures will have a
combined market cap of Rs.50,000 crore to begin with.

How will the ZEE - Sony merger be structured?

While Zee Entertainment is still struggling for cash to bankroll its expansion plans, the merger
with Sony Pictures will give the combined entity greater access to cash flows and capital heft.
Currently, as per the relative valuation ratios, Zee should have a stake of around 61.25% in the
merged entity. However, it is Sony Pictures that will bring in the much needed cash into the
combined venture. In fact, Sony will bring with it an assurance that the merged entity will have a
cash chest of at least $1.5-1.6 billion or Rs.11,000-12,000 crore.

As a result, Sony Pictures will get a larger 52.93% share in the combined entity. The balance
47.07% stake will be held by Zee Entertainment. Since Zee Entertainment will cease to exist as
an independent entity, the shareholders of Zee will  be issued shares of the merged entity on a
proportionate basis. Sony Pictures will be the majority partner in the merged entity. 

Progress on the ZEE - Sony merger deal so far

As of now only the approximate ratios are worked out and the term sheets have been exchanged
and agreed upon. There are bigger challenges like approval from the two boards, convening of an
EGM to get the approval of minority shareholders; including institutional shareholders etc. For
Zee, the merger will not only be based on the financial heft that Sony brings to the table but also
on the strategic advantages of reach and eyeballs.

As of now, the shareholders of Zee and Sony Picture have entered into a non-binding term sheet.
As per the term sheet, they will combine their linear networks, digital assets, production
operations and program libraries to create a common pool with greater synergies. There will be a
time limit of 90 days within which both Zee and Sony Pictures will conduct due diligence of
each other through data rooms.

Since Zee is a listed entity, the deal will require the approval of the stock exchanges and SEBI.
Since both the channels come under the Ministry of Information and Broadcasting, the approval
of the ministry will also be mandatory. In addition, since it is a combination that will consolidate
market share, the approval of the Competition Commission of India (CCI) will also be required.

Both Zee and Sony Pictures believe that the merger will be value accretive for the combined
entity. The stock of Zee Entertainment has already rallied more than 70% in the last one week.
Zee has advantages like expertise in content creation, regional bouquet of quality content and
deep consumer connect over 30 years. Sony Pictures has been successful in various
entertainment genres, especially in the highly lucrative gaming and sports segments.
 

What will the financials of the combined entity look like?

Here is a quick comparison of the sum of parts of the combined entity.

Financial Parameters Zee Entertainment Sony Pictures Combined Entity

Annual Revenues Rs.7,730 crore Rs.5,846 crore Rs.15,000 crore
Net Profits Rs.793 crore Rs.976 crore Rs.2,000 crore
Cash on Books Rs.1,800 crore Rs.11,000 crore Rs.12,000 crore

A quick look at the above date is sufficient to tell you that while Zee does score on revenues, it is
Sony that scores on net profits, margins and in cash stash. That is what has given the advantage
to Sony in the merger deal.
What role will Punit Goenka play in the merged entity?
As per the term sheet, Punit Goenka (son of Subhash Chandra) will continue as managing
director and CEO of the merged entity for 5 years. In addition, Subhash Chandra family will
have the leeway to increase its stake from 4% to 20% in line within extant rules. The challenge
will be that INVESCO Fund and OFI Global China Fund had objected to the continuation of
Punit Goenka as the CEO of Zee. They hold a combined 18% in Zee and their vote will be
critical for the deal. That would be the next part of this emerging story

Sony-Zee merger will bring revenue synergies of 3-4%: Punit Goenka

Goenka stated the synergy benefit will mainly come from advertising revenue while the
subscription revenue synergies will depend on the amendments that TRAI makes to the NTO

e4m

by exchange4media Staff

Published: Nov 14, 2022 7:26 PM | 4 MIN READ

Punit goenka

The merger deal between Zee Entertainment Enterprises Limited (ZEEL) and Culver Max
Entertainment (Sony) will bring revenue synergies of 3-4 per cent for the merged entity, ZEEL
chief Punit Goenka said during the company's Q2 FY23 earnings call. On a standalone basis,
ZEEL's revenue will see synergy benefits of 6 per cent, he added while stating that the synergies
will be mostly revenue-driven.

"It will be largely revenue driven and we are expecting about six odd per cent synergy benefits of
Zee's standalone revenue and if you would look at it on a combined basis it will be between three
and four percent of the combined MergeCo's revenues," Goenka told analysts.

He further stated that the synergy benefit will mainly come from advertising revenue while the
subscription revenue synergies will depend on the amendments that the Telecom Regulatory
Authority of India (TRAI) makes to the New Tariff Order (NTO). The regulator is expected to
come out with amended tariff order any time soon.
"The most lucrative area is the advertising pie and based on how the new NTO shapes up and
how we bring the two bouquets together will determine whether even in a subscription we can
see a bump up. Right now, synergy is largely driven by the international markets, digital
business, and advertising," Goenka added.

The Competition Commission of India (CCI) recently approved the Sony-Zee merger with slight
modifications which will see the latter selling three of its channels to allay potential competition
concerns. The merger deal was subsequently approved by a majority of ZEEL shareholders.

Goenka also said that the merger will get completed within this fiscal. He also stated that the
company will get delisted for about five to six weeks following the merger. "So for the timelines
of the merger completion, we are working with a target that it should be completed within this
financial year and this is something that we are grappling with on a daily basis because these
regulatory approvals are required and we can't give you one final date."

He noted that ZEEL has been able to moderately grow its advertising revenue sequentially in Q2
despite the macroeconomic headwinds. "We remain hopeful of a steady recovery in the
advertising environment during the second half of the fiscal given some of the green shoots due
to a good monsoon and the onset of the festive season," he said.

Speaking about the acquisition of the ICC cricket rights, Goenka said that the sports business is a
key focus area for the company. "In addition to strengthening our current offerings, we are also
consistently identifying newer growth opportunities for sustained value creation. We took yet
another firm step in this direction by sharpening our strategic vision to build the sports business
for the company. The strategic licensing agreement inked with Disney Star makes Zee the
exclusive TV destination for all ICC events starting in 2024. Going forward all our investment
decisions to make the sports segment a compelling value proposition for the company will
continue to be taken with a prudent approach," he elucidated.

ZEEL, Goenka said, doesn't need to launch sports channels since the merged entity will have a
formidable sports network. "We will have a formidable sports network in the MergeCo and there
is no reason why we will not use that as a platform. In the unlikely event that the merger does not
take place, we will have to launch sports channels," he said.
On the impact of the pullout of Hindi GECs from DD Free Dish by the big broadcasters, Goenka
said that the move has helped in arresting the decline of the pay base of the direct-to-home
(DTH) platforms.

"Absolutely, the churn has been reduced and the subscriber base is now stable at the 53+ million
mark. In fact, in September, it was 53.8 million so it's a healthy sign. We were hoping it will
increase but that has not translated yet and the industry is going to wait and watch before we take
a decision on what way we want to go," he added.

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