Zee Entertainment Enterprises rallies over 20% on merger with Sony India; what's next?

Shares of Zee Entertainment Enterprises (ZEEL) climbed over 20% at Rs 306.80 apiece on Wednesday, after the company said its board approved the merger between the firm and Sony Pictures Networks India. The board of ZEEL present and voting in its board meeting held on 21 September 2021, unanimously provided in-principle approval for the merger between Sony Pictures Networks India (SPNI) & ZEEL.

ZEEL and SPNI have entered into a non-binding term sheet to combine both companies’ linear networks, digital assets, production operations and program libraries. The term sheet provides an exclusive period of 90 days during which ZEEL and SPNI will conduct mutual diligence and finalize definitive agreements. The merged entity will be a publicly listed company in India.

The shareholders of SPNI, will hold a majority stake in the merged entity. The shareholders of SPNI will also infuse growth capital into SPNI as part of the merger such that SPNI has approximately $1.575 billion at closing, for use in pursuing other growth opportunities.

The indicative merger ratio would have been 61.25% in favour of ZEEL. However, with the proposed infusion of growth capital into SPNI, the resultant merger ratio is expected to result in 47.07% of the merged entity to be held by ZEEL shareholders and the balance 52.93% of the merged entity will be held by SPNI shareholders.

As part of the transaction, Punit Goenka will continue to be the managing director and CEO of the merged entity. However, majority of the board of directors of the merged entity will be nominated by Sony Group.

Further, certain non-compete arrangements will be agreed upon between the promoters of ZEEL and the promoters of SPNI. According to the term sheet, the promoter family is free to increase its shareholding from the current 4% to up to 20%, in a manner that is in accordance with applicable law.

The board has authorized the management of ZEEL to activate the required due diligence process.

The board concluded that the merger will be in the best interest of all the shareholders & stakeholders. The merger is in line with ZEEL’s strategy of achieving higher growth and profitability as a leading media & entertainment company across South Asia.

Speaking on the development, R. Gopalan, chairman, ZEEL said, “The value of the merged entity and the immense synergies drawn between both the conglomerates will not only boost business growth but will also enable shareholders to benefit from its future successes. As per legal and regulatory guidelines, at the required stage, the proposal will be presented to the esteemed shareholders of ZEEL for their approval.”

ZEEL is a media and entertainment company engaged in providing broadcasting services. On a consolidated basis, ZEEL posted a net profit of Rs 213.8 crore in Q1 FY22, steeply higher than net profit of Rs 30.37 crore in Q1 FY21. Net sales increased 35% to Rs 1775 crore in Q1 FY22 from Rs 1312 crore posted in Q1 FY21.

On 14 September 2021, ace investor Rakesh Jhunjhunwala’s Rare Enterprises bought 50 lakh shares (0.52% equity) of ZEEL at Rs 220.40 per share on the NSE.

On the same day, BofA Securities Europe SA also bought 48.65 lakh shares (0.51% equity) of ZEEL at Rs 236.20 each through a bulk deal on the NSE.

As on 30 June 2021, BofA Securities Europe SA – Odi held 1.03% stake in the the broadcasting company.

Invesco Developing Markets Fund and OFI Global China Fund LLC, which together own a 17.88% stake in ZEEL, recently called for an EGM to remove Punit Goenka from the firm’s board as director.

Goenka, son of Essel Group founder and chairman Subhash Chandra, is managing director and chief executive officer of ZEEL.

The two institutional investors also called for the removal of two of ZEEL’s independent directors, Ashok Kurien and Manish Chokhani. The letter also proposed the appointment of six independent directors, including Surendra Singh Sirohi, Naina Krishna Murthy, Rohan Dhamija, Aruna Sharma, Srinivasa Rao Addepalli and Gaurav Mehta.

On 13 September, ZEEL informed that Chokhani and Kurien resigned as non-executive non-independent directors.

ZEEL held the 39th annual general meeting of the equity shareholders on 14 September 2021. The AGM did not discuss the notice sent by its largest shareholder, seeking an EGM of shareholders to remove Punit Goenka from the board.

Brokerage view

Santosh Meena, head of research, Swastika Investmart said, “ It was expected that Punit Goenka will not easily lose his positions and Zee may come up with a white knight or other counter offer but the market knew that it will be a win-win situation for Zee shareholders whether there will be any change in management and board or some other player come to buy a majority stake in the company.”

He further added that the announcement of a deal with Sony will be a very positive trigger for Zee as it will have a quality promotor and that will ease the issue of corporate governance in the company. Though the deal is a nonbinding agreement so it will take some time for more clarity but this deal will bring a good synergy for both the company to grow their businesses and the combined entity will become the largest player in the industry.

“The stock is trading at very attractive valuations and it is one of the strongest and FIIs favorite stocks in the media space and if this deal concludes then we may see a big rerating in the counter.

Technically, it is witnessing a breakout of falling channel formation and manages to move above its all-important moving averages where Rs 300 is an immediate and psychological hurdle. Above this, it is likely to head towards Rs 350. On the downside, Rs 250 has become a strong support mark,” said Meena.