Sony-Zee Merger Called Off: Is It A Strategic Move?
In the Sony-Zee merger, Zee informed that in India it had been called off.
In the realm of special situation investing, where individuals have amassed substantial wealth through events like mergers, demergers, and cancellations, one might wonder about the potential outcomes for stockholders in India engaging in similar transactions. If an individual were to purchase stocks during a merger or demerger scenario in India, what implications might arise?
It appears to be a simple situation. Zee aimed to avoid a potential takeover by Reliance Industries and in this effort, extended an olive branch to Sony. While Sony expressed interest in acquiring Zee, the intricacies of the merger were not transparent to observers. The merger was abruptly halted by Zee's Punit Goenka, who holds only 4 per cent equity. This raises concerns about corporate governance issues.
It's confusing to me as there are numerous mutual funds and major investors holding over 5 to 8 per cent equity. With such stakes, one might wonder why they didn't take steps to remove Punit Goenka. Surprisingly, he remains in his position, and today marks the official end of the merger. On closer inspection, the conclusion of this merger leaves me puzzled, but it seems like there might be another narrative in the making.
Regarding the merger, Zee incurred expenses of Rs 200-300 crore and subsequently refunded the money to stakeholders. After navigating a lengthy process with NCLT, they progressed towards the merger. However, just before the 21 January deadline, news surfaced indicating that the merger might be abandoned. If the merger is indeed called off, the stock market is likely to experience volatility. It suggests that there were possibly two considerations in play. Initially, there might have been a plan to proceed with the merger, but at some point during the process, a decision could have been made to halt the merger and maintain the status quo. It appears they have two options: either proceed with the merger or retain the current state of affairs.
One option would be that Zee is expecting someone else could be looking into it and they are able to sell it for which I think the real reason for the merger would be two-fold. Firstly, there will be many issues in Zee’s financial accounts that it would be difficult to hand over. That will be all the financial issues, how do we handover because what happens is that sometimes someone or the other comes and says that our money is left, so I think that would be the first reason.
The second reason, I think would be that till the time Zee is sitting on the helm with the cash box, they are safe, but the moment they give away the charge, a lot of more revelations would be found which will also create an issue. I think that would be the intention of the merger but if the intention changed in between then what would be the reason behind it?
I have a feeling, I am not sure though that now this merger will come back. Zee by itself will not work, that is for sure as Zee’s properties and business channels and the amount of reach, infrastructure, network they hold, will not be able to run by themselves.
To run this infrastructure and network, I feel that they will need a big network’s support.
Will NDTV take Zee now? I think the path is clear for NDTV. If NDTV takes over Zee, the gaps of NDTV in the entertainment sector would be bridged. NDTV in itself has no exposure to general entertainment nor do they have a library so it would be beneficial for NDTV to take over Zee.
NDTV means the Adani Group, so are they planning to take over Zee? I think some planning would be going around the same because on its own, Punit Goenka single-handedly would have not refused such a pleasing offer with Sony.
Will Adani Group come in between now? I feel if Adani Group receives the opportunity, they will definitely take it. Additionally, there is no extra expense to it. I think the work will be done at Rs 10,000 - Rs 20,000 crore. In this amount, general entertainment, news channels and more will be a part of the takeover.
On its own, Zee lacks independent financial stability to sustain and survive, therefore a change in ownership is inevitable. My suggestion is that Adani Group can be a potential candidate for Zee’s acquisition, it would be a perfect fit. Presently, the stock is poised for a decline.
The unprecedented failure of a merger post-NCLT approval adds complexity, especially in the context of global corporate governance norms. Legal complexities loom as the companies must retract their requests and revisit the NCLT. There is a lot of legal work ahead of Zee, according to me, if no other party is willing to take Zee right now, then it will be very difficult for Zee to survive on its own strength.
The Zee story is a classic story of how leverage and low ROI business destroys you. Subhash Chandra used to be a pioneer in news broadcasting in India. When he started his news broadcasting business with Zee Entertainment in 1990-91. As money started flowing in, Subhash Chandra diversified into unrelated activities like infrastructure, SL Propack which used to make toothpaste tubes. Because Zee was their biggest cash cow, they leveraged Zee and took out loans on that to fund their other businesses. Their peripheral businesses failed over time and ultimately, the main business has also started failing.
Many times you have a good business running and you think that you should diversify from the money coming from this business. If you have money coming in, it does not mean that you have to do something else all the time, you can use it and enjoy and give that cash a dividend instead of going ahead and doing unrelated diversification.
Keeping all this in mind, I feel that Zee as a stock will take a major beating. It might be prudent for investors to cut losses and give up their positions in the stock. On the other hand, I feel that Zee will not survive on its own and it will inevitably be taken over by some other company. The specific acquirer, however, remains uncertain, marking a challenging phase for the company.
The author is Market analyst
It’s Basant Maheshwari's personal views and BW Businessworld does not endorse it
