Zee-Sony Merger Scrapped: All Eyes On Institutional Shareholders

Sony Group's termination of its planned merger with Zee Entertainment Enterprises Ltd. brings the focus to the institutional investors who backed the management of the Indian broadcaster when the deal was facing several hurdles from financial creditors and regulators.

Institutional investors have backed Punit Goenka for building a business that got Sony Corp. interested in consolidation in India. But this backing was only because of the inherent strength of the business and media properties that were created by Goenka.

Mutual funds, insurance companies and foreign portfolio investors hold over 70% of the company. And patience seems to be running out for a section of this category of shareholders who backed the company despite governance concerns.

Mutual funds have been the biggest backer of the Essel Group, supporting it even during the defaults, and they waited for the asset monetisation to happen to recover their dues. They hold over 32% of Zee Entertainment, followed by insurers that own 10.6% and foreign investors holding 27.22%.

Together, institutions held nearly 71% of the company at the end of December 2023. In contrast, the promoters held 3.99% at the end of this period.

Sony called off the merger, stating that Zee did not meet the conditions precedent, among them financial management and recovery of dues from the related party. The issue of Punit Goenka heading the merged entity was just one of the issues. There were others, including Goenka's directorship once he would have opted to step down and the strength of the balance sheet.

The company's financials appear to be a key dealbreaker. Sony, it seems, was worried over the related-party dues and balance sheet that it would inherit after the merger. It didn't want a large part of the Rs 10,000 crore infusion to be used for cleaning up the balance sheet.

Zee is a net-cash company with hardly any debt but, according to its balance sheet for the quarter ended September 2023, the trade receivables had risen to Rs 2,186.4 crore from Rs 1,533 crore at the end of March 31, 2023. The extent of related-party receivables within this is not clear.

This could be just one of the many conditions that needed to be met before the merger was completed or for the parties to jointly agree to extend the deadline.

It now seems Sony was adamant on all financial and governance conditions to be met before the merger date could be extended. Zee, despite Goenka agreeing to step down, may not have been in a position to meet them.