Twists in Sony-ZEE Merger saga; Invesco stands firm over removal of Punit Goenka

Industry:    2021-09-27

Invesco, the largest investor Zee Entertainment Enterprises(ZEE), reiterated its call for an extraordinary general meeting (EGM) to discuss the ouster of three directors and the inclusion of six independent board members, signalling that the tussle for control continues. This follows the announcement by the ZEE management of a plan to merge with Sony Pictures Networks India (SPN) that will see the latter take majority control while leaving MD and CEO Punit Goenka in charge.

Invesco had sought the removal of Goenka along with two other directors. Those two directors quit ahead of the September 14 annual general meeting (AGM).

The announcement of the non-binding merger pact on Wednesday underlines Invesco’s case for change, it said in a September 23 note to the ZEE board. Invesco said it had first sought an EGM to discuss the matter of directors on September 11.

Sony has signed a non-binding merger deal with Zee Entertainment. ET’s Gaurav Laghate takes you through the deal’s contours, which will create an entertainment behemoth with 75 channels and how company promoter Subhash Chandra proved once again that he is a master at the art of making a deal when the chips are down. Watch

“Your disclosure of 22 September 2021 is symptomatic of the erratic manner in which important and serious decisions have been handled at the company,” Invesco said in the letter, which ET has seen. “Precisely to protect shareholder value and in the exercise of our statutory rights as an ordinary shareholder, we have called upon the company to hold an EGM, and it is your duty under company law to now do so.”

A ZEE spokesperson said that the Board is seized of the matter and the Company will take necessary action as per applicable law.

Invesco didn’t respond to queries.

ZEE

Invesco, which holds a 17.88% stake in ZEE, said “decisions of material strategic import must follow and not precede actions towards establishment of a proper and independent governance structure as determined by the company’s shareholders.”

ZEE and SPN, a step-down subsidiary of Sony Corp, announced the signing of an exclusive nonbinding term sheet for a proposed merger of the two companies on September 22 that would create India’s second-largest entertainment network by revenue if it took place. Goenka, who was driving the merger talks, will remain MD and CEO of the company for at least five years under the terms of this accord. Goenka is the son of ZEE founder Subhash Chandra; the promoters hold a 3.99% stake in ZEE.

“A newly constituted board supported with the strength of independence will be best suited to evaluate and oversee the potential for strategic transactions… as well as to make determinations on the future leadership of the company,” Invesco said.

A senior partner at a law firm said that while the ZEE board will have to evaluate the matter and take a call, it was surprising that Invesco is looking at removing someone who has been backed by the proposed majority investor.

“One has to seriously ask what are Invesco’s motivations and intentions behind the steps they are taking,” he said. “Ultimately, if it comes to an EGM, shareholders will have two options. Either vote to keep Punit on the board who has run the company for so long and is going to drive the merger and create value for them, or remove him without any viable alternate plan, which is surely going to derail the merger and most probably erode the company’s value.”

Experts said a merger would unlock value for shareholders and investors should back the plan.

“A change in the top management might impact the negotiations and implementation of the proposed merger with Sony. If shareholders want the merger, they might be hesitant to rock the boat at this juncture,” said Sudip Mahaptra, Partner at S&R Associate.

Proxy advisory firm InGovern Research, which had earlier raised concerns over corporate governance at ZEE, said there was nothing wrong in CEOs initiating merger discussions and then approaching shareholders for a vote.

“Invesco did not have an alternate plan and hence, it would be surprising if it is not supportive of this merger. As a fund, Invesco 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. Also, Invesco could well just withdraw its EGM call,” it said in a series of tweets on Wednesday.

InGovern added that Goenka’s capabilities as the CEO of a leading media company weren’t in question. “Invesco was unhappy about the governance of ZEE due to the group company issues. So, Punit Goenka as the proposed MD of the merged entity should not be a concern,” it said.

The proposed new independent directors are Surendra Singh Sirohi (independent director, HFCL); Naina Krishna Murthy (founder and managing partner of K Law); Rohan Dhamija (senior partner, Analysys Mason); Aruna Sharma (independent director, Welspun Enterprises and Jindal Steel); Srinivasa Rao Addepalli (independent director, Tata Communications Payment Solutions); and Gaurav Mehta (India head, The Raine Group).

“These six additional independent directors come from diverse backgrounds and are expected to bring additional professionalism, guidance and standards of governance to the operations of the company,” Invesco said. “Together with the existing set of independent directors, we believe the company’s board will have the depth to navigate the company into the future.”

Some investors said those proposed by Invesco don’t have experience in the media and technology space and some don’t have significant experience on boards of publicly listed entities.

Analysts have said the merger will have a positive impact on ZEE as there are more areas of synergy than there are overlaps. They said the combined entity will have a profit after tax (PAT) of about Rs 3,100 crore, a price-earnings multiple of 16x-17x and a market cap of Rs 50,000-60,000 crore.

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