Sony terminates $10 billion merger deal with ZEE

Sony Group Corp. has officially called off its plans for the $10 billion merger with the media network, Zee Entertainment Enterprises Ltd. This comes after a two-year acquisition saga, leaving Zee vulnerable to competition from rivals like Reliance Industries Ltd., Walt Disney Co., Netflix Inc. and Amazon.com Inc.

The entertainment giant sent a termination letter to Zee on Monday as the conditions necessary for the merger were not met.

The decision comes in the wake of a disagreement between the firms regarding the leadership of the merged entity, with questions arising about Zee's CEO Punit Goenka's role amidst an ongoing investigation by India's capital markets regulator into his conduct. 

Culver Max Entertainment (previously Sony Pictures Entertainment) shared a statement which reads, “Culver Max Entertainment (CME) today issued notice to Zee Entertainment Enterprises Ltd. (ZEEL) terminating the agreement dated December 22, 2021, to merge ZEEL and CME. Although we engaged in good faith discussions to extend the end date under the merger cooperation agreement, we were unable to agree upon an extension by the January 21 deadline. After more than two years of negotiations, we are extremely disappointed that closing conditions to the merger were not satisfied by the end date. We remain committed to growing our presence in this vibrant and fast-growing market and delivering world-class entertainment to Indian audiences.”

The termination letter from Sony came after a 30-day grace period ended over the weekend when the two sides couldn’t reach an agreement on a deadline set in late December. Late last week, Zee had written to Culver Max Entertainment for an extension to the merger deadline that ended on January 20.

The collapsed deal, which had received almost all regulatory approvals, would have created an entertainment behemoth in which Sony was supposed to own a 50.86% stake, with Goenka’s family owning 3.99%.

Karan Taurani, Sr. VP of Elara Capital says, “We believe the above will have a negative impact on both parties, as both companies are going through stiff competition from digital media and face a potential threat from the merger of RIL/Disney over the near term.” 

Zee has reported a muted performance in terms of growth and profitability over the last two years, as revenue growth has converged to 2.2% (FY20-24E) and EBITDA margin dipped to 10.2% (9MFY24E), due to 1) losses in the OTT segment and 2) lower growth in linear TV segment, as per Elara Securities.

In line with this, Taurani mentions, “We believe Zee will see a sharp de-rating of PE valuation multiples towards at least 10x one year fwd. or lower, due to the merger potentially being called off, as 1) linear TV growth has converged sharply, 2) Zee may not have any potential to scale up OTT offering in a highly fragmented market, 3) lower profitability - EBITDA margin ex-sports losses could converged towards 14% and 4) any further write-offs on the inventory side or matters pertaining to related parties creditors or not honouring the sports contract with Disney (ICC tournaments - Z could have potentially paid half of the USD 3bn value for TV rights).”

Sony could have to pay a penalty of USD 100 million, for calling off the merger as per media reports; Elara Securities foresees that too will go through a legal hurdle due to disagreement between the two parties.

The worst-case TP for Zee could be in the range of INR 130 (including sports losses) and INR 170 (ex-sports losses - assuming Zee does not fulfil sports rights commitment with Disney).

Zee’s profit for the year ended March 31 dropped 95% to 478 million rupees ($5.8 million) compared with the previous period.

Sony, which which will now have to redraw its media plans for India, was expected to benefit from Zee’s library of content in regional Indian languages and its local television channels.