In November, the legal team of Zed Enterprises Entertainment Ltd. sent the attorneys for Sony Group Corp. a bad surprise during a regular call. Only weeks before the agreement deadline of December 21, after nearly two years of arduous merger negotiations to establish a $10 billion Indian entertainment giant, Zed wanted the Japanese business to accept a so-called "hold harmless" clause for its CEO, Punit Goenka. Sony executives questioned why Goenka sought indemnity, given that he had already been accused of financial misconduct by India's markets regulator many months prior.
As for Goenka, he was concerned that once the merger was finalized and Sony got what it wanted - access to Zee's extensive collection of regional entertainment content—it would launch a witch hunt against him. Speaking with persons with knowledge of the situation who requested anonymity since the conversations were private, the story of this weeks-long impasse was pieced together.
Sony was no longer prepared to proceed with Goenka leading the combined company since he was unwilling to give up his position as CEO. When Sony's board members convened in Tokyo on January 19, the agreement collapsed. On January 22, Zed received a 62-page letter of termination claiming the failure to meet certain prerequisites specified in the merger agreement.
Unequal Impact
The deal's cancellation highlights the difficulties foreign businesses face when trying to break into Asia's largest entertainment sector. Access to a $25 billion market is hampered by a cultural divide and the disproportionate influence that India's founding generation of business magnates still has over their enterprises.
"Differences in corporate culture, accounting practices, and reporting standards pose a challenge for cross-border transactions in India," stated Utkarsh Sinha, managing director of Mumbai-based boutique investment bank Bexley Advisors. He stated that although there is a "bridge to cross," there is also a "pot of gold" in the Indian demography.
Email inquiries for comments on the problems that caused the agreement to fall through were not immediately answered by representatives for Sony or Zed. The CEO of Sony India wrote a letter on Wednesday, hoping to boost staff morale, but it lacked specifics about the company's strategies to counter competitors. In order to merge its activities in India and establish the biggest entertainment company in the country, Walt Disney Co. is in talks with Reliance Industries Ltd.
The Reliance-Disney company "will have all the might in the market" as a result of the failure of Sony and Zed, according to Karan Taurani, analyst at Elara Securities India. "They will gain pricing power in the market as they become the preferred platform for content creators and advertisers."
Angry Bosses
According to a second source with knowledge of the matter, Zee's exchange filing on December 17 asking for a deadline extension without consulting Sony executives in the US or Japan likewise infuriated them. The dispute arose shortly after Goenka and his father, Subhash Chandra, were accused by the Securities and Exchange Board of India (Sebi) of "abusing their position" and embezzling money "for their own benefit" in June. During the course of its examination, the regulator also prohibited them from having any executive or director positions in listed corporations.
Goenka was partially exempted from Sebi's prohibition in October by an appellate body, which permitted him to continue in these roles while the investigation was ongoing. Sony objected, but Zed interpreted this appeal victory as approval for Goenka to lead the combined company as CEO. According to those acquainted with the situation, the tycoon offered to serve as interim CEO until a search committee could be formed to look for a different candidate. However, Sony now desired to name N.P. Singh, its head of India operations, as CEO.
Bluffing Game
The ensuing months resembled a bluffing match. Given that Zee's was the only significant media asset available to support the Japanese company's less than 10% market share, Goenka anticipated Sony would give up. Zed boasts hundreds of local television channels and a vast library of regional language programmes, accounting for 17% of the Indian television market.
With Zee's declining financial standing (earnings for the year ended March 31 declined 95 percent) and the obligations Chandra and Goenka had to settle, Sony was prepared for Zed to blink. Furthermore, Sony hoped that Goenka would resign from Zed because the founders only owned 4% of the company.
Zee's stock fell 30% on Tuesday during trading in Mumbai following the cancellation of the agreement, and at least eleven brokerages, including CLSA, reduced their recommendations for the firm. It's possible that some investors are still hoping to make the deal work. Without Goenka, Elara's Taurani stated, "There is also some likelihood of the shareholders - top five owning about 30% put together — who may work together to do the deal with Sony."
Sony's White Knight
Goenka is hardly a novice to this arena. Previously holding the largest 18% ownership in Zed, funds run by Atlanta-based Invesco Ltd. fought in 2021 to oust Goenka from both the board and as CEO, claiming that the company's founders were benefiting themselves at the expense of common shareholders. Ironically, Sony was Zee's saviour at the time thanks to a merger agreement that calmed Invesco, which has since reduced the majority of its ownership in the Indian business.
According to those acquainted with the case, Goenka has been meeting behind closed doors with his key lieutenants, including Shyamala Venkatachalam and Vikas Somani, at his 16th floor office in Mumbai's central district since mid-December. Zee's transactional lawyer was also contacted multiple times.
The soft-spoken Goenka has appeared composed and unflappable to many who have seen or spoken to him in the days preceding the termination, in contrast to his father who was notorious for his furious outbursts. In actuality, Goenka was in the holy city of Ayodhya on January 22, the day he received the termination notice and precisely 25 months after the merger was announced, as a VIP guest of the Indian government that was launching a new temple. That day, Goenka said that the Sony deal's collapse was "a sign from the Lord" in a post on X, the former Twitter.
