What would it take for the Zee Sony merger to go through

Puneet Goenka is confident, but…

In a recent interview with a leading newspaper, Puneet Goenka has reiterated that the Zee Sony merger would go through; irrespective of whether he remained the head of the venture or not. It may be recollected that when the Zee Sony merger deal was announced more than a year ago, it not only had a  non-compete fee payable to Essel family, but had also announced the continuation of Punit Goenka at the helm of the merged entity. The merger was to create a $10 billion entity which virtually lords over the Indian sports and entertainment landscape. However, several impediments cropped up along the way.

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SEBI order could be a dampener for the Zee Sony deal

The Zee Sony merger was not without its controversies. Invesco, then the largest shareholder of Zee Entertainment, had wanted Punit Goenka to exit the board. Invesco had raised objections on governance grounds. However, the deal went through and the only option that Invesco had was to think with its feet and exit its holdings in ZEEL. But that was hardly the end of the story. Just last week, SEBI passed a rather scathing interim order against Subhash Chandra and Puneet Goenka. It accused both of allegedly round tripping funds into unlisted entities and imposed a 1 year ban on Subhash Chandra and Puneet Goenka on holding any KMP position in any listed Indian entity.

Where does the SEBI interim report stand now?

As of now, the matter is sub judice. The Securities Appellate Tribunal (SAT) had refused to suspend the SEBI order at the request of the Essel promoters. For now, SEBI has been aggressive and has also asked SAT to pass the order against the promoters of Zee quickly since it involved serious issues of corporate governance. Till this point, there has not been much of a debate about the Zee Sony deal. Puneet Goenka is still confident that the deal with Sony will go through while Sony Pictures has abstained from making any comment on the subject. In short, not much is being written about the deal officially, although doubts are starting to be raised about it.

What were the specific issues raised by SEBI

Barring promoters from holding KMP in any listed entity is a serious issue and SEBI must have had enough reasons for the order. According to SEBI, the promoters of Zee had used a convoluted and layered approach to round trip the funds. To begin with, Chandra had given a letter of comfort backed by ZEEL FDs to Yes Bank against loans extended to unlisted group companies. While the board was kept in the dark, the bigger concern for SEBI was about the audit trail of funds. SEBI had alleged in its order that the unlisted companies did repay Rs200 crore to ZEEL, but these funds also came from the flagship, ZEEL. In short, the resources of a listed company with public shareholders had been used to repay debt of an unlisted entity, closely held by the promoter group.

BOFA has concerns over the Zee Sony deal now?

In a recent report, BOFA Securities has underlined that the Zee Sony merger could be in trouble. There are two issues and let us talk about the corporate governance issue first. Most of the global players like Sony are extremely conscious and fastidious about corporate governance issues. As long as objections were coming from an institutional investor like Invesco, Sony was still willing to give the benefit of doubt. However, if the order comes from SEBI, then Sony may be a little more sceptical about going ahead with the merger. Especially, since the order pertains to a serious issue like diversion of funds.

But, there may also be a business angle to it. Zee has seen its ad revenues dipping and it has been losing a lot of its mojo in terms of subscription revenues. Also, the SEBI order is likely to impact the valuations assigned to Zee. All in all, BOFA feels that Sony may do a serious rethink of the deal!

Content Source: Live Mint