Sony Group Corp’s subsidiary Culver Max Entertainment Ltd has abruptly terminated its long-anticipated merger with Zee Entertainment Enterprises Ltd (ZEEL), sending shockwaves through India’s media and entertainment industry. This termination dissolves the ambitious plan to create one of the nation’s largest media conglomerates, a vision two years in the making.

What Happened? Sony issued a stark press release on Monday, announcing the end of the definitive agreements with ZEE and further demanding a hefty $90 million (₹748 crore) termination fee.

This move not only signals the collapse of the merger but also sets the stage for a potential legal showdown, as Sony cites “alleged breaches by ZEEL” as a reason for the termination. In response, ZEEL has vowed to contest Sony’s claims vigorously and protect its stakeholders’ interests.

The merger, initially set to conclude by the end of FY22, faced multiple delays due to regulatory hurdles and legal challenges faced by ZEEL’s promoters. This delay was further compounded by disagreements over the leadership of the merged entity. Sony proposed NP Singh, a seasoned Sony executive, for the CEO role, opposing ZEEL MD and CEO Punit Goenka’s continuation amid an ongoing investigation by the Securities and Exchange Board of India (SEBI).

Despite Goenka’s willingness to step down for the merger’s success and his attempts to negotiate with Sony executives, the deal crumbled. Sony’s insistence on having Singh lead the merged entity, prioritizing corporate governance, failed to align with ZEEL’s vision, leading to the deal’s demise.

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What do analysts say? CLSA downgraded Zee from “Buy” to “Sell,” cutting its price target from ₹300 to ₹198. The firm expects Zee’s valuation to drop to August 2021 levels, a significant decrease from the merger’s estimated value.

CLSA highlighted Zee’s corporate governance issues, notably the 2019 promoter share pledging crisis. This event drastically reduced the promoter’s stake from 42% to 4%. The merger would have given Sony a 51% stake, presenting a solution to the low promoter holding issue.

A potential merger between Reliance Industries and Disney Star is expected to intensify the sector’s competition. Citi also downgraded Zee to “Sell,” reducing its stock price target from ₹340 to ₹180. The firm cut its earnings estimates for 2024-2026 by 22% to 38%, citing increasing competition.

Motilal Oswal Financial Services downgraded Zee to ‘Neutral,’ lowering its price target by 13% to ₹200. The firm sees no short-term earnings recovery for Zee and mentions uncertainties regarding Zee’s plans and potential legal issues with Sony.

Price Action: Zee Entertainment Enterprises Ltd. shares were already trading 9.98% lower at ₹208.30 on Tuesday after markets opened for trading.

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