Bangalore : Zee Entertainment Enterprises Ltd and Sony Pictures Networks India will have to pay a $100 million termination fee if either of them decides to end their $7 billion merger, which is not only difficult but also very costly.
Two senior Zee executives, seeking anonymity, said that if the merger fails to secure shareholder and regulatory approvals, the separation clause will not apply.
“Well, not because of shareholder approval etc. This does not create any liability. But if we breach, then maybe,” Zee chief executive Puneet Goenka told analysts on September 22 in response to a question on the liabilities on the company if the merger fails.
Zee’s head of mergers and acquisitions, Vikas Somani, clarified on the investor call, “There is an exclusivity obligation on the other, and a penalty attached to it.”
According to a person familiar with the deal, Somani did not specify the amount of the fine, but it is $100 million. He declined to be named. A break-up fee is usually included in large acquisitions.
Emails sent to Zee and Sony spokespersons for comment did not elicit any response.
The binding merger agreement envisages Sony to hold a 51% stake in the combined company, while Zee founder Subhash Chandra and his family hold 4%, with the remaining 45% being held by existing Zee shareholders.
Zee K Goenka will head the combined company as CEO, while Sony will appoint a majority of directors on the board of the merged entity.
Zee expects to complete the merger within 8-10 months, during which it expects approvals from regulators including the Competition Commission of India, the Ministry of Broadcasting, the stock exchange and the National Company Law Tribunal.
The future of this merged entity rests on Zee’s rightful owners: the shareholders. For now, Zee hasn’t disclosed when it will put this merger before shareholders to vote.
The role of Zee’s largest shareholder, Invesco, the American fund manager, which owns 17.88%, assumes significance. Invesco, which had previously rebelled against Zee, and demanded a special shareholder meeting in September, has not said whether it will vote on the deal after Zee and Sony signed a definitive agreement on September 21. Will do
An email sent to Invesco seeking comment remained unanswered.
In a letter dated September 11, Invesco first asked Zee to hold a special shareholder meeting, reconstitute its current board, remove Goenka and induct six independent directors. In the past 100 days, Zee has refused to accede to Invesco’s demands, and the two sides are locked in a legal battle before a companies court in Mumbai and the Bombay High Court.
Most analysts are bullish on the prospects of the merged entity, which will also become the country’s largest listed media firm.
“Spend capacity of the merged entity 3,000 crore a year is the same as Netflix 3,000 crore India material investments in the last two years,” wrote Motilal Oswal analysts Aliasgar Shakir and Harsh Gokalgandhi in a December 22 note.
However, many believe that the success of the merged entity depends on how the merged entity improves its corporate governance record. Zee, in the past, has been plagued by questionable corporate governance policies, which led to the resignation of three independent directors in December 2019.
“Improvements in corporate governance and operational performance can help immensely in the long run,” analysts at Motilal Oswal wrote in the note.
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