After three months of comprehensive audit of each other’s financial books, Zee Entertainment Enterprises and Sony Pictures Networks India have signed a definitive merger agreement amid a knotty legal fight between the former’s founders and its largest shareholder, Invesco of the US.
With Zee’s founders holding a tad below 4% in the company, the support of Invesco, which owns nearly 18%, could be crucial as the merger requires the approval of 75% of the shareholders. The definitive agreement retains the terms of the preliminary merger proposal, first announced on September 22.
Though Invesco had welcomed the merger between Zee and Sony, it had said that it was against any such terms that unfairly rewards the former’s founders at the expense of other ordinary shareholders. According to the contours of the deal, Sony will pay a non-compete fee of Rs 1,100 crore to Zee’s founders, which they will use to acquire 2% in the merged entity. This will help them maintain their 4% shareholding, similar to what they held prior to the merger. Besides, the founders can raise their stake to 20% from 4% in the combined entity through open market purchases. The merger will dilute Invesco’s stake to 8%.
Invesco had requisitioned Zee to call a special shareholders’ meeting to remove CEO Punit Goenka, whose father founded the company in 1992, over alleged “corporate governance failures”.
But Zee got a judicial order against the Atlanta-based fund’s request. Invesco had challenged this and the matter is currently being heard in the Bombay high court.
According to the terms of the deal, Goenka will lead the combined entity, which will be India’s second-largest media and entertainment company with over $2-billion revenues. However, an adverse judicial order for Zee could throw a spanner in the works of the merger.
“We hope shareholders will see merit in the deal in totality. We will be approaching them, including Invesco, with the proposed transaction, in due course,” said Zee CEO Goenka. He also said that he hasn’t approached Invesco to resolve the feud yet. But he would be willing to engage with them. “Unfortunately, the matter has been sub-judice, so we consciously decided not to engage with Invesco.”
Besides the approval of shareholders, the merger is subject to regulatory and other third-party approvals. Zee and Sony expect the merger to be concluded in fiscal 2023. Sony will hold about 51% in the combined entity, which will be listed on the bourses.
“The merger will transform Zee into a subsidiary of Sony USA, an MNC. This would also enhance corporate governance practices,” said InGovern founder Shriram Subramanian. “Invesco would find it hard to vote against the merger as it would be counterproductive and put Zee back to the past.”