Introduction

Zee Enterprises Ltd. revealed its intention to merge with Sony Pictures India Pvt. last year. The parties were able to finally come to an agreement this time where attempts had failed due to structural disagreements in the past. The deal has been in the works for more than a year, which is typical for an M&A transaction of this magnitude. Both the entities followed the due process of law to complete the acquisition and the deal, to an extent, may be termed an an opportunity for Sony to increase its market presence in the country.

It goes without being said that the combined entity will have a strong presence in the entertainment, sports and regional markets. It will be now the second largest entertainment network in India with 75 channels and a total revenue of 1.8 billion US dollars making it a serious player in the industry. After receiving approval from the SEBI, stock exchanges and the National Company Law Tribunal (NCLT), Mumbai to convene a general meeting to approve the merger, the completion of the transaction was delayed due to concerns raised by the country's anti-trust regulator. The Competition Commission of India (CCI) released a statement earlier this month approving the transaction with certain modifications. A detailed order is yet to be released.

Analysis

To understand the regulator's initial concerns, we need to look at the structure of the deal and its impact on the media and entertainment sector.

As mentioned earlier, the proposed combined entity would now only be second to Disney India & Star in India as per their market share. Sony has had a difficult journey when they lost the broadcasting rights of the prominent Indian Premier League (IPL) which led to doubling of their revenue and increase of the net profit six-fold. As for Zee, the stock swap talks with Viacom 18 fell through. ZEE also faced tough questions about the corporate governance from Invesco, which is one of its majority shareholder. ZEE could only do so much as its promoters had little leverage in negotiations and the holding company level of ZEE had a substantial debt of around Rs. 11,000 cr. Since it was a win-win situation for both parties, Sony saw an opportunity and acted as a white knight.

Structure of Agreement

Zee Entertainment has struggled to raise money to support its expansion aspirations, but the merger with Sony will give the combined company better access to cash flow and financial strength. At the current valuation, Zee Entertainment will hold the remaining 47.07% of the merged company, giving Sony Pictures a larger stake of 52.93%. SONY will guarantee that the combined company will have, at least, Rs. 11,000-12,000 crore in cash. For the next five years, Mr. Punit Goenka will continue in his role as MD and CEO. Zee Entertainment shareholders will receive pro rata shares of the combined company as ZEE Entertainment ceases to exist as a separate legal entity. Sony Pictures will be the majority partner of the merged entity.

Speed breakers

An injunction was issued in October 2021 by a single judge of the Hon'ble Bombay High Court against the order of Invesco Developing Markets Fund to call a meeting of ZEE shareholders. Invesco had requested that ZEE shareholders meet to discuss the proposals having an agenda including removal of its three non-independent directors of ZEE and appointment of six independent directors. According to Invesco, it sought changes to ZEE's board to protect the company's minority shareholders and improve governance standards at board level. Zee board did not convene a general meeting of shareholders or take any action in response to the request. In light of this, Invesco approached the NCLT, Mumbai seeking instructions on how to conduct the meeting, among other things. The NCLT directed ZEE to consider Invesco's application in its preliminary order. ZEE's board reviewed Invesco's application. ZEE concluded that Invesco's request was illegal as the resolutions Invesco wanted to bring to the meeting were contrary to the law. The Bombay High Court allowed Invesco's appeal against the injunction issued by the single judge. The said merger comes with a time when the dispute is still ongoing. As such, notwithstanding the judgment of the Bombay High Court, Invesco has decided not to exercise its right to call for a shareholder meeting.

Competition Commission of India

In August, the CCI had communicated to the companies through a notice that their “humongous market position’’ would allow them to enjoy “unparalleled bargaining power”. As per the Commission, the merger could lead to an abuse of dominance as it would give the 92 channels in India's vast media and entertainment sector unrivaled bargaining leverage. The merged company will strengthen its position and generate more profits. In the popular Hindi market, in particular, the CCI was concerned about the extent to which the merged business would affect competition in terms of advertising and channel pricing.

With Star as a "marginal second", the combined company would have a share of roughly 45% in the Hindi category, which has the largest audience in the country. The two companies would attract more ad revenue from streaming services and broadcast television, competing with Disney India, whose Star network has dozens of popular entertainment and sports channels. This would further concentrate such segments at the expense of competition, the CCI further added in its notification.

As a response, Zee and Sony submitted voluntary remedies that did not include structural changes, but proposed at least two “behavioral remedies”. Under these remedies, it said the merged entity would be open to offering mandatory price incentives and rebates to all channel distributors, such as direct domestic satellite operators or fair and non-discriminatory terms, for a certain period of time after the transaction. It further states that in order to mitigate concerns about the entity's strong market position among advertisers, the parties have proposed the creation and operation of "independent advertising verticals" for a period of time.

Last week, the Competition Commission of India has given conditional approval to the proposed merger. The watchdog tweeted that it has cleared the deal with certain modifications. The Commission did not elaborate on the modifications sought. However, it is understood that the regulator has asked the parties to ensure that there is no abuse of its market dominance. The two parties had made a presentation before the CCI as well where they stated that they will not abuse their market dominance and not charge a higher fee from advertisers or DTH providers for a fixed period. Some reports have also claimed that Zee would even shut down a popular general entertainment channel. The identity of the channel has not been disclosed.

Opinion

The media and entertainment industry is an essential part of the creative economy. By all accounts, the merger is a positive step. ZEE is a home-grown Indian venture and its merger with a major international player bodes well for the industry as it will surely drive industry consolidation and growth while attracting more investment. The author is of the opinion that in order for the media and entertainment sector in India to grow, this merger will have a huge impact on the industry. In order for such M&A to pave the way for an active and growth-oriented future of the sector, a broad approach needs to be developed across the legal, policy and regulatory environment.

The author further suggests that the financial investors should not immediately step into the role of strategic partners, instead they should maintain trust in the company's management and board and put in place the necessary checks, balances and governance controls, if required, to create value for all stakeholders. This is crucial if management is to consistently generate profits. The entities are likely to benefit from the strategic support and input, however unwarranted intervention from the regulators may result into unintended consequences for the entertainment industry.

The combination of Zee-Sony will have the best position as the main competitor in the market. With Star & Disney India currently owning the broadcast rights of IPL, previously owned by Sony, several players will have to invest heavily to ensure a level playing field that is both competitive and lucrative. The huge job prospects that the combined company will be able to create may completely change the creative ecosystem, which in turn would boost advertiser sentiment and spending. In order to compete with global giants like Google and Facebook which are expanding their presence in the Indian market rapidly, the Indian legislator should encourage formation of large entities which have equivalent amount of resources at their disposal.

The author is also of the opinion that the current Indian media and entertainment sector has only two big players apart from Zeeand Sony, i.e. Star-Disney andViacom, backed by Mr. Mukesh Ambani. In order to preserve the legacy created, the formation of Zee-Sony entity will contribute to a third major player which will democratize and level playing field in the sector. Unless the larger Indian business houses invest and create bigger players in the sector, a prudent approach would be to encourage consolidation to create more such entities and ensure a level play fieldto continue to grow in the media and entertainment sector.