The collapse of the Sony-Zee merger and its wider implications

Japan’s Sony Corp. has sought $90 million in termination fees from Zee Entertainment Enterprises Ltd after snapping merger negotiations that would have created among India’s largest media networks. The unravelling of the deal will hurt both companies, say experts, especially in the context of the ongoing talks for a merger of Disney Star with Reliance Industries-controlled Viacom18 Media Pvt Ltd. Disney Star is already India’s leading network, with more than 30% share of the market. Mint explains the wider implications of Sony’s decision to not go ahead with the merger after two years of negotiations.

Why was the Sony-Zee deal terminated?
Sony Pictures Entertainment formally terminated its merger agreement with Subhash Chandra-led Zee Entertainment on Monday, bringing India’s largest-ever entertainment deal yet to a collapse after months of debate over the appointment of a chief executive officer for the merged entity.

As per the original deal terms signed two years ago, Punit Goenka, the managing director and CEO of Zee, was supposed to head the merged entity.

However, on 25 April 2023, the Securities and Exchange Board of India accused Chandra and his son Goenka of diverting at least 200 crore from Zee via certain promoter group firms. Goenka challenged the order before the Securities Appellate Tribunal, which set aside the order pending the completion of Sebi’s probe.

The Japanese media giant, on the other hand, was pitching its India head, N.P. Singh, to be the CEO of the merged entity. Goenka was opposed to this.

What does this mean for the two companies?
Media and entertainment industry experts say following the termination of the merger, Zee will need a cash infusion given its mounting debt and reducing margins.

As for Sony, it will lose out on access to Zee’s strong regional and sports portfolio.

“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% (FY20-24 estimated) and EBITDA margin dipped to 10.2% (9 months of FY24 estimated), due to losses in the OTT segment and lower growth in the linear TV segment,” said Karan Taurani, senior vice-president at Elara Capital Ltd.

Also, Zee had signed a sub-licensing contract with Disney for 2024-27 International Cricket Council tournament rights. Elara has estimated annual losses of about 1,520 crore due to this in FY25 and beyond due to hefty content costs, lower sports ad revenue, and cricket content being available for free on over-the-top streaming services.

Moreover, Zee may now not be able to fulfil its commitment to the contract as it has a cash balance of only 600 crore versus a potential contractual obligation of 4,000 crore per year, Taurani said.

What’s the likely impact on India’s media industry?
Disney and Reliance Industries have signed a non-binding agreement for a merger of their Indian media operations. Reliance will own a 51% stake via a combination of shares and cash, and Disney the remaining 49%. The collapse of the Zee-Sony merger will allow the Disney-Viacom entity to have the biggest pie of India’s TV ad market, at 40-45%.

There had been speculation that Walt Disney might sell its business in India. However, CEO Bob Iger had said during the company’s September-quarter earnings call that the company would like to stay on in the Indian market.

Uncertainty around the fate of these mega deals has resulted in a major slowdown in greenlighting decisions at media companies, particularly in the OTT ecosystem, as content creators awaited clarity. Even in the linear television category, new show launches have been few and innovation negligible.

“A lot of things have remained up in the air owing to these mergers with a big part of company budgets currently just going to returning seasons of established franchises. Hopefully, OTT buying will resume after things stabilise,” a senior content producer said in a recent interview, declining to be named. LiveMint