Zee-Sony merger crisis: The merger may have been called off, but it has led to a wave of consolidation in the industry

After huffing and puffing, the much-touted merger between Culver Max Entertainment (Sony India) and Zee Entertainment Enterprises (Zee) was finally called off just a little over two years since it was announced amid fanfare. Had the deal gone through, it would have created a broadcasting major with 75 channels and two OTT platforms, with a strong presence in entertainment, sports and regional channels. Besides, there was limited overlap, making it a clear strategic fit.

But the merger came up against many challenges along the way. The most prominent among them was an interim order by the Securities and Exchange Board of India (Sebi) last June that barred Essel Group Chairman Subhash Chandra and his son Punit Goenka from holding key managerial positions in Zee. Sebi accused them of having diverted money to private entities. While Chandra is the Promoter of Zee, Goenka is the company’s MD and CEO. More critically, the latter was tipped to be the MD and CEO of the merged Sony-Zee entity. The case landed in the courts and, not entirely unexpectedly, Sony pulled the plug on the deal.

The question now is how Zee and Sony will deal individually with a challenging media and entertainment landscape. Much has changed in those two years, and there is the possibility that the two will have a media behemoth to compete with. This is because Reliance Industries’ media business and Disney Star are looking to merge their operations, and there are concerns about the merged entity’s impact on smaller players, as the broadcasting business will have close to 110 channels.

According to Utkarsh Sinha, MD of Bexley Advisors, a boutique investment bank focussed on the tech and media sectors in India, given how fragmented the media and OTT (over-the-top) businesses are today, scale and heft are critical factors in negotiating content. “I suspect that with the Zee-Sony merger being called off, both parties will find content acquisition harder. Zee owes over $1 billion to Disney Star for the ICC tournament rights (this was announced last August where Disney Star sub-licensed the television rights) and that will be harder to meet now,” he says. A look at the financials reveals how beneficial a merger would have been for the two. In FY23, Zee had revenues of over `8,000 crore, while Sony’s stood at `6,700 crore.

Sinha expects a wave of consolidation in the sector over the next two to three years, with Sony-Zee having kicked it off and now Reliance-Disney entering the fray. He doesn’t rule out the possibility of a big surprise in the altered situation. “With the departure of Sony as a suitor, it would not be surprising to see Reliance roll in Zee as part of its consolidation move. This will not be as a replacement for Disney, which has a significantly richer content base, but as a way to gather additional eyeballs, reduce stress on the consumer wallet and eliminate competition.”

Vivek Menon, Managing Partner at NV Capital, a media and entertainment (M&E) credit fund, is clear that both Zee and Sony will operate as separate operating companies as it was two years ago. “The legal implications will now need to be assessed and this could play out for a long time in the courts,” he says. The upshot for the industry, according to him, is that linear television growth is plateauing.

“Cord cutting is gathering momentum. Broadcasters who make the transition seamlessly between linear and non-linear apart from enhancing their bottom line will be in pole position to take advantage of the growing digital market,” says Menon. That means striking the right equation between cost and profitability is critical.

The fallout of the failed merger threatens to drag on for some time as both Zee and Sony have taken the legal route. Sony has approached the Singapore International Arbitration Centre (SIAC). Meanwhile, Zee has knocked on the National Company Law Tribunal’s (NCLT) doors, asking it to enforce the merger scheme.

For investors, the Zee stock has been a disappointment having plummeted over 30% the day the merger was called off. A report put out by Emkay Global has called this a “major setback” for the company. “This termination is despite Punit Goenka agreeing to step down as the MD and CEO of the merged entity, as per Zee. We believe this breakdown can also spur shareholder activism against Zee’s management and reckon that Zee will now draw other suitors for potential deals,” it stated. The adverse report was “due to weak competitive positioning and escalated corporate governance issues”. Chandra, meanwhile, has told the media that the promoter group is considering raising its stake in Zee by five percentage points.

On the way forward for the industry, Sinha of Bexley Advisors believes that an inflationary environment would make the consumer even more conscious of how much she is spending. Anticipating a significant wave of media consolidation, he says there will be an overall reduction in the number of platforms, combined with reduced spending on content in the medium term.

“It is not hard to imagine a landscape five years from now being dominated by a few marquees that have absorbed many of the players that lie scattered around the media landscape today. They will command a similar percentage of the consumer wallet, but with a larger individual share for each of the survivors,” Sinha adds.

There is certainly a lot brewing in this space.

@krishnagopalan