Zee-Sony merger breakdown: An unfavourable endgame that could lead to more legal battles
ZEE on January 22 received a communication from Sony Pictures Networks India, purporting to terminate the Merger Agreement dated 21st December 2021, and seeking a termination fee of USD 90mn on account of alleged breaches by ZEE of the terms of MCA, invoking arbitration and seeking interim reliefs against ZEE. Why Sony called off the merger? Sony hascalled off the mergeralleging breaches by ZEE of the terms of MCA, invoking arbitration and seeking interim reliefs against ZEE. ZEE has denied all the assertions raised by Sony on the alleged breaches under the terms of the MCA, including their claims for the termination fee. ZEE mentioned that the company took all steps in line with the Merger Cooperation Agreement, approved by its shareholders and all regulatory authorities and has consistently worked towards the implementation of the mentioned scheme in the interest of the shareholders. ZEE also mentioned that it held several deliberations and good faith negotiations with Sony, with a view to consider an extension (six months) of the merger completion timeline, that did not materialise. Any legal steps being taken by Zee? Zee is evaluating all the available options and will take all the necessary steps to protect the long-term interests of all its stakeholders, including by taking appropriate legal action and contesting Sony India’s claims in the arbitration proceedings. Possible outcome of the event Zee will continue to evaluate organic and inorganic opportunities for growth, leveraging the intrinsic value of its assets. Zee has clearly mentioned that Mr. Punit Goenka agreed to step down in the interest of the merger and proposals in this regard were discussed, including for appointment of a director on the Board of the merged company, in the best interest of Zee’s directors and shareholders. Hence, the actual reason of Sony terminating the merger remains unknown; however, we believe that Mr Punit Goenka demanding a higher non compete fee in place of stepping down from the merged co CEO or demand for a new CEO candidate, apart from Sony’s current CEO (Mr NP Singh), could be the probable reasons for Sony backing out Over the near term, we foresee valuations of Zee to be under pressure, as merger with Sony was the key driver for valuations to move up over last two years. With the merger being called off - the worst-case TP for Z could be in the range of INR 130 (including sports losses) and INR 170 (ex-sports losses - assuming Z does not fulfil sports rights commitment with Disney). Further, this move will also lead to multiple legal hurdles like 1) battle with Sony over the non compete fee, 2) legal proceedings if Zee does not fulfill contract wirh Disney (sports contract) and 3) ongoing legal proceedings by various creditors of the Essel group (Axis Finance, IDBI Bank etc ) View
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Tags : Merger Sony Zee Karan Taurani Elara Capital