Zee shareholders’ nod to Sony deal likely as it addresses major issues

As of June, foreign institutional investors held 57.46% and non-institutional investors 19.93% in ZEEL, and the remaining was owned by mutual funds, insurance companies and others.

By Rajesh Kurup

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The shareholders of Zee Entertainment Enterprises (ZEEL) are likely to support the proposed merger with Sony Pictures Networks India as the deal would address several concerns that had arisen after its largest shareholder sought the removal of two directors and the company’s MD and CEO Punit Goenka. With the announcement of this deal, the road map for the company is a lot clearer.

The merger addresses a key concern of institutional investors, which was to get a strategic investor into the company after Invesco sought a change in the board and company’s top management. Following the stake sale by the promoter group to Invesco Developing Markets Fund (earlier known as Invesco Oppenheimer Developing Markets Fund), the shareholding of promoters fell to less than 4% in the company. As of June, foreign institutional investors held 57.46% and non-institutional investors 19.93% in ZEEL, and the remaining was owned by mutual funds, insurance companies and others.

Given that the promoter shareholding was only at 4%, the management would have had to engage in a prolonged battle against the largest shareholder without a white knight. “How long could the management hold on to something it wasn’t in control of? I think the timing of the merger proposal is right,” Vinit Bolinjkar, head of research at Ventura Securities said. “Sony is also a strong brand, has been in the Indian market for a long time and has grown through acquisitions. So, it is aware of the cultural issues and what is required in the Indian media space,” he added.

The deal would address some concerns that minority shareholders would have had. Edelweiss in a note on Wednesday said, “At some stage, minority investors would have had to look for a strategic investor, which gets addressed upfront.” The company would be a key re-rating candidate if corporate governance issues are sorted out.

Ravishu Shah – managing director and co-head valuation at RBSA Advisors says that the continuation of Goenka as MD and CEO of the merged “may entail challenges” due to the stressed relationship between certain institutional shareholders of ZEEL and its management, he said.

According to Ashwin Patil, Senior Research Analyst (media) at LKP Securities, “Effectively, Goenka finds a white knight to salvage himself from being forced to move out. Further, ZEEL would also be significantly re-rated”.

“Invesco did not have an alternate plan and hence, I would find it surprising if it is not supportive of this merger. As a fund, it would be interested in financial returns and clean governance. With Sony as a majority shareholder and a likely reconstituted board, the merged entity would be the best solution Invesco could have hoped for,” Shriram Subramanian, founder and managing director of proxy advisory firm InGovern Research Services said.

“Invesco was unhappy about the governance of Zee due to the group company issues. So, Goenka as the proposed MD of the merger entity should not be a concern,” Subramanian added.