Zee-Sony likely to keep both brands, aggressively bid for sports

Sony will be in control of the merged entity with a nearly 51% stake

Zee Entertainment Enterprises and Sony Pictures Networks India are likely to keep both flagship brands of the two companies going after their merger, while investing heavily into sports and digital businesses, according to comments made by Zee management after announcing the deal.

“Both the brands are strong brands, and with loyalty attached to themselves. So the board will take a prudent call at the right time,” said Zee Entertainment CEO Punit Goenka, slated to lead the merged entity, adding that the final decision will be taken by the company board after merger.

Zee Entertainment, the No.2 broadcasting company in India with a share of around 18%, and Sony Pictures Networks India (SPNI) with a share of around 9%, announced their merger earlier this week, potentially creating the No.1 broadcasting company in India.

The current No.1, Disney-owned Star group, will find itself relegated to the No.2 position with its 24% market share.

According to media reports, Reliance Industries, which owns the Network18-Colors broadcasting groups, was also interested in acquiring Zee Entertainment, which has the distinction for being the oldest private broadcasting brand in India.

However, Zee promoter Subhash Chandra family was more keen on going with an international brand, as indeed they made clear several times earlier.

Because of the tussles that preceded the deal, some believe that Zee’s rivals could lobby the government to block the deal, claiming that it would hurt competition.

However, Punit Goenka, also the son of Zee founder Subhash Chandra, said his company does not expect any delay from the side of any government or regulatory agency such as Competition Commission of India. He pointed out that a very similar deal was given the blessing by the CCI recently, possibly referring to the Vodafone Idea merger that saw the amalgamation of the former No.2 and No.3 players in the Indian telecom market.

“We don’t expect anything of the sort. It’s going to be a form 2 filing. There is a precedence in terms of a merger of this scale and size that has just taken place in the recent past. Therefore, we don’t see any issues,” he said.

PLANNING AHEAD

The key reason for the merger is learnt to be the fear by the existing promoter — Subhash Chandra family — of an external actor trying to acquire Zee by stealth or force, given that the promoter’s share is only around 4% of the total shares. In comparison, two entities which often act together — Invesco Developing Markets Fund and OFI Global China Fund LLC — together hold close to 18% of the company’s shares.

The new deal has been designed to please non-promoter shareholders, most of which are organized/institutional in nature, and dangles the prospect of strong growth and better margins under the leadership of Sony Pictures Networks, a part of Japan’s Sony group.

Under this deal, Sony has promised to bring in cash of $1.5 billion (Rs 11,250 cr) — including around Rs 1,100 cr being paid by Sony to the Subhash Chandra family as a ‘non-compete fee’. This promise was extracted in lieu of Sony’s wish that it should own 51% in the merged entity and have control of the board.

Interestingly, the amount being paid to the existing promoters by Sony as ‘non-compete fee’ will also come back to the merged company, as the existing Zee promoters are supposed to use that amount to buy fresh shares in the merged entity, thus ensuring that their stake in the merged entity does not get diluted below the 4% they currently own in Zee Entertainment.

Nevertheless, the biggest infusion of cash will come by way of Sony subscribing to fresh shares of the merged entity worth $1.1 bln — taking the total cash infusion into the merged company to over $1.20-1.25 bn. The remaining $250-300 mn will also be invested by Sony, possibly by way of share purchases in Zee Entertainment before the merger.

Together with the cash that is currently there on the balance sheet of Zee Entertainment and Sony Pictures Networks India, the merged entity will therefore start life with an enviable cash corpus of an estimated $1.8-1.9 bn.

Punit Goenka indicated that this cash will be used primarily for two key purposes — acquiring more sports content and improving digital presence.

Zee currently has negligible sports content. At the same time, Sony’s sports channels — which it purchased from Zee group several years ago — are not comparable in their appeal to Indian users to sports channels from the Star group.

It is therefore more than likely that the new, merged company will try to seize the rights of key sports tournaments such as Indian Premier League and ICC Cricket World cup from Star.

As for digital, the two companies are not present in the list of the top three content apps in India.

Here too, the lead is with Star Group’s Disney+ Hotstar app, followed by Amazon Prime and Netflix. These three are estimated to account for 80% of the Indian on-demand digital content revenues.

Zee’s Zee5 and Sony’s Liv apps are together estimated to account for just 13 or 14%.

Indeed, Punit Goenka indicated that the above two goals are interconnected, as winning a strong sports property like IPL or World Cup could easily catapult an app into the top 3.

As such, said Goenka, the new company is likely to be more aggressive than either have been so far in its bids.

“It does not mean that we will start pouring oodles of cash into losses, [but] if it means short-term losses for the gain of the OTT business, we will make those prudent calls at the right time,” he said.

Further betraying his intentions, he added that the new company is “highly unlikely” to buy broadcast-only rights of sports tournaments, and would bid for both digital and broadcast rights.