The Zee Crisis: Is the Subhash Chandra-led entertainment company's ongoing merger with Sony in jeopardy?

For Subhash Chandra, 72, facing challenges is a way of life. From staving off a takeover bid by Rupert Murdoch in the late 1990s to setting up the ill-fated rebel cricket league ICL, the home-grown entrepreneur—who made his name as the Founder of Zee TV—may well have lost count of how many he has faced. And he has emerged unscathed in most instances, though he has lost a big chunk of his shareholding in Zee Entertainment Enterprises Ltd (or ZEEL, that had revenues of Rs 8,170 crore for FY23) and is the crown jewel of his Essel Group.

The present challenge is quite a different story, though. He is dealing with a host of serious allegations from capital markets regulator Securities and Exchange Board of India (Sebi) around corporate governance. This will test Chandra’s mettle—and that of his son Punit Goenka—and he will have to draw upon his wisdom from many a battle to deal with it. For the man who got into television broadcasting without a background in the business—and carved out an empire—competition has come from several quarters and it did make a dent, but Chandra managed to hang on. The ability to think out of the box stood him in good stead earlier. Will that help him this time?

Tough times

For ZEEL, which was in the thick of a merger (more on this later) with Sony Pictures Network India (now called Culver Max Entertainment), the interim order from Sebi on June 12 was a bolt from the blue. Referring to an issue that dates back to September 2018, it said Chandra and his son Goenka (MD & CEO of ZEEL) had abused their board positions as directors/key managerial personnel of ZEEL for “siphoning off funds for their own benefit” and barred them from holding directorships in listed entities. This is significant as Goenka is slated to be the MD & CEO of the merged entity after the Zee-Sony union.

What was the genesis of the problem? For Chandra, now ZEEL’s Chairman Emeritus and Chairman of the Essel Group, an earlier foray into infrastructure led to a highly leveraged balance sheet. Shares of ZEEL were pledged and, over time, his holding in the company dropped. In November 2019, two independent directors—Neharika Vohra and Sunil Kumar—stepped down, with the former, according to Sebi’s order, stating in her resignation letter that, “At the 17 October, 2019 meeting, it was brought to light via a letter received by the board from the concerned bank that guarantees have been given to a subsidiary without approval from the board. The operating team treated the issue very casually.” This relates to a Rs 200-crore loan from YES Bank to Essel Green Mobility and associated entities, which was on the basis of a letter of comfort (LoC) from Chandra. The lender (YES Bank) “had adjusted a fixed deposit of Rs 200 crore of Zee for meeting the obligations of the seven entities,” (the interim order addresses them as associate entities) towards the bank. Essel Green Mobility is one of the seven; the others are Pan India Infraprojects, Essel Corporate Resources, Essel Utilities Distribution, Essel Business Excellence Services, Pan India Network Infravest and Living Entertainment Enterprises (see chart ‘Merry Go Round’).

But what does Essel Green Mobility do? A credit rating report on the company put out by Acuité Ratings & Research on April 15, 2019, says its business model is mainly divided into two verticals, viz. transport solutions and energy storage. “In transport solutions, Essel Green Mobility will develop a network of electric three-wheelers (autos) and electric buses by which it will own a fleet of these vehicles. In the energy storage vertical, it plans to manufacture lithium-ion battery cells in collaboration with a global company,” it says.

Shriram Subramanian, Founder and Managing Director of InGovern Research Services—a corporate governance advisory firm—says the bigger issue relates to Reserve Bank of India guidelines. “Banks, in this case YES Bank, give loans to promoters of unlisted companies based on guarantees and letters of comfort from a listed company. This is flawed as the listed company is not entirely owned by the promoter. In this case, YES Bank has knowingly given loans based on a comfort letter by the Zee Chairman.”

The father-son duo promptly appealed against the Sebi order at the Securities Appellate Tribunal (SAT). After hearing the lawyers representing Sebi and ZEEL’s promoters, the tribunal, on June 27, reserved its order, while lawyers for Chandra and Goenka had sought a stay. From a legal point of view, there are a myriad possibilities now. According to Avanti T. Chandele, Partner at law firm Mind Legal, Sebi’s interim order indicates it has found substantial evidence regarding alleged misconduct or violation of regulations. “Challenging the order through an appeal is the only viable legal option available to ZEEL,” she says. In the process, a stay will allow the company to continue its operations without feeling the impact of any restriction. “That said, it is important to note that this does not imply exoneration from the underlying allegations but merely provides temporary relief while the legal proceedings continue.”

Merger and more

How did the merger come about? In mid-2021, ZEEL was mired in a battle with Invesco, an Atlanta-based investment management firm that held an 18 per cent stake in the company. The accusations were serious and again related to corporate misgovernance at ZEEL. In that backdrop, the market was caught off guard when, in an announcement to the stock exchanges in the third week of September, the ZEEL board approved a merger between Sony Pictures Network India and itself. The combined entity—with Goenka at the helm—would have revenues of $1.79 billion, making it the second largest entertainment network after Disney Star. Together, Zee-Sony would have 75 channels, two OTT platforms and two studios, and a strong presence in varied genres such as entertainment and sports, and in the regional markets. “I told Sony about what was going on [referring to Invesco] and left the decision to them,” Goenka told Business Today earlier this year. ZEEL did not respond to queries from BT for this story.

The current legal tangle raises questions on the fate of the merger. However, Vivek Menon, Managing Partner at NV Capital, a media and entertainment credit fund, does not think it will be affected because it is between two organisations. “Let’s not forget that over the last year, there have been many stumbling blocks, such as issues at the NCLT (the National Company Law Tribunal) and neither party gave up. The Competition Commission of India too has blessed this deal,” he says. And ZEEL will not want a long battle in court; its share price since the time the merger was announced has gone southwards after an initial spike (see chart ‘Highs & Lows’).

For Sony too, growth has been challenging ever since it lost the media rights to marquee cricket tournament Indian Premier League in late 2017 to the then Star India. For FY22, it had total revenues of Rs 6,771 crore, up 20 per cent from FY21 and a 60 per cent surge in net profit; however, compared to FY20, profit was virtually unchanged.

“This merger is a win-win situation for both. Coming together is the only way to take on Viacom18 and Disney Star on broadcasting and Netflix and Amazon on OTT,” says Menon. InGovern’s Subramanian says the Sebi order does not implicate ZEEL as a company. “If Goenka does not hold the position of MD, the process will not be under any pressure. The opportunity for Sony is huge and the past issues should have come up anyway at the time of due diligence.”

Meanwhile, on June 21, a statement from Sony’s headquarters referred to “several media reports” around the future of the planned merger following Sebi’s order and said: “We take very seriously the Sebi interim order and will continue to monitor developments that may affect the deal.” This terse statement from Sony is prone to several interpretations.

According to experts, large investments are required in the OTT business, especially when rivals have deep pockets. “A merger of this magnitude gives them ammunition to retain and potentially increase their subscriber base, plus with the fund injection from Sony’s parent, there is a big opportunity to beef up OTT content,” explains Menon. As a part of the deal, Sony’s parent will infuse $1.5 billion in the merged entity besides holding a majority stake of 50.86 per cent, with ZEEL’s shareholders at just over 45 per cent. The ZEEL promoters would have just 4 per cent. Critically, serious time and effort has gone into this merger, with the teams at both ends drawing up their strategies for a post-merger scenario. “To unwind now and go back on all of that is a big ask. For now, both these organisations need to come together to retain their relevance and look for ways to increase market share,” he adds.

The bigger issue from a legal standpoint, however, relates to Chandra and Goenka. “ZEEL’s shareholders had approved the merger with the knowledge that Goenka will be a part of the new entity. They can decide to revisit the decision since the circumstances have changed. However, this has to be done through NCLT since it is the tribunal that needs to relook at any decision taken by ZEEL’s shareholders,” says Ashish Kumar Singh, Managing Partner of Capstone Legal, a law firm. Of course, time is limited, with industry dynamics, most notably the increasing presence of OTTs, changing. Besides, working under a legal overhang comes with uncertainty.

Brokerage analyses reflect this. A report put out by BofA Securities on June 19 said it has a “no rating” on ZEEL since it awaits visibility on the merger going through or not. It elaborates on how the company’s fundamentals are deteriorating on account of three factors. One is business momentum being weak with the expectation that revenue growth would remain slow on the back of slower advertising and subscription. It then picks out the continued investigation by Sebi as being an increased corporate governance overhang. “The latest was when Sebi said that Zee’s promoters diverted money from the listed entity and barred Punit Goenka from holding board/top executive positions in listed companies—potentially preventing him from being the CEO of the merged Zee-Sony entity.” The third factor is the risk to the merger, where BofA says that “the bull-case on Zee was that post-merger with Sony, the corporate governance and business momentum would improve with Sony’s management getting involved. But post Sebi’s order against Zee, this puts at risk the merger with Sony.”

Even a diehard optimist would concede that there is a lot at stake in this long battle and anything conclusive looks some time away.

@krishnagopalan