Sony and Zee wait for Godot
It’s been over two years. Will Sony India and Zee Entertainment pull off their merger? What would a no-deal mean for India's media & entertainment industry?
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While you and I were winding down and bringing in the new year with loved ones, two of India’s biggest media companies were burning the midnight oil. A $10 billion merger, first announced over two years ago, should have closed by now. But the fates of Sony and Zee are still hanging in the balance as both race against a deadline which, just like Godot, never seems to arrive.
Will Sony and Zee’s merger even get done?
This week, Bloomberg and then The Economic Times reported that Sony is walking away from its much-delayed merger with Zee Entertainment. Zee has denied the reports: in a stock exchange filing (pdf), it said both parties were still negotiating to clinch the deal.
The last deadline for the deal was December 21; Zee asked for a month-long extension, but Sony has reportedly yet to respond to the request formally.
So… is it over? And if so, what happens next?
Zee and Sony’s high-stakes endgame
The bone of contention is about who will lead the merged firm. A quick recap: the Goenkas want Punit Goenka to lead the newly merged company as originally decided, but Sony does not. Sony is concerned about the funds misappropriation allegations against Goenka, although market regulator Sebi has lifted a ban that prevented him from leading any listed firm or its subsidiary.
As per The Economic Times, Sony’s global management is also concerned about Zee’s deteriorating finances, precisely why the Goenkas (and Zee’s shareholders) need the merger to happen. They’re insisting on having Sony Entertainment’s longtime India head NP Singh run the show, even as prominent legal minds say the deal can’t go ahead without sticking to its original terms, which include Punit Goenka as CEO.
But without Punit Goenka as CEO, all the Goenka family will have in the new merged entity is a 4% stake and no direct representation on the board of directors. Punit Goenka has been preparing for the top job for two years now, and executives in top positions are bracing for impact as is inevitable with a merger.
So, the question is: who has more to lose from walking away?
Arguably, the answer is Zee. At this size and scale, there are almost no viable alternatives to a deal with Sony. Sun TV’s Kalanithi Maran is a possible suitor; Disney had also reportedly held talks for an acquisition with the Tamil media empire. And if all else fails, Reliance may swoop in to ‘rescue’ Zee once it is done closing the Disney deal. The Goenkas, struggling with debt and holding shares pledged with lenders, need cash to keep the shop running. In the last five years (pdf), Zee Entertainment’s consolidated revenue from operations has stagnated, and its operating profit margin has fallen to less than half. Net profit margin has gone from a healthy 19% in FY19 to just 3% in FY23. Zee is pumping whatever money it can into the business, but it’s going to waste: the company’s return on capital employed (ROCE), a measure of investment efficiency, has fallen from 26.5% to just 5% in the last five years.
The strain of a cash crunch is already visible. Just yesterday, Zee missed making a $200 million payment to Disney for a set of ICC cricket broadcasting rights.
Besides, it’s not really just the Goenkas’ decision alone. With just 4% stake in the firm, they’re negotiating a deal as a minority interest, holding the remaining 96% stake to ransom. Holders of this majority stake probably care more about the merger going through than whether Punit Goenka gets to run the show or not.
In this scenario, it makes sense that Sony may be threatening to walk out. Zee Entertainment’s shares closed 8% lower on the stock market yesterday but bounced back over 2% today. Given Zee’s denial of reports claiming the deal is closed, could those at the negotiation table be posturing publicly as a pressure tactic?
Some believe so. For instance, an analyst at brokerage firm Elara Capital said that Sony and Zee’s merger is likely to go through without Punit Goenka at the helm.
Arguably, Sony won’t be able to just shake off the consequences of a no-deal. Along with Zee, it will be up against the combined might of Reliance and Star as Disney prepares to sell its Indian TV, film, and streaming assets to Network18. Together, the two firms will dominate television with a bouquet of popular Hindi and other regional language channels.
Besides, Reliance is merging Network18 with two of its subsidiaries that house the group’s news properties, creating a consolidated TV, films, news, and digital business. On the other hand, Hotstar’s parent entity Novi Digital is merging with Star India, also an attempt to bring all its media ventures onto one balance sheet. A streamlined structure will probably turn Reliance-Star into a media powerhouse with as big an insurmountable lead as the one Sony and Zee would have together.
Although market shares are difficult to determine especially in TV, Star and TV18 clearly have as much muscle as Sony-Zee will. In fact, Reliance-Star will also have the added advantage of a sprawling news business valued at over ₹9,500 crore (~$1.14 billion) and three massive film studios: Viacom18, JioStudios, and Fox Star India. Even if we assume the Competition Commission of India will force Reliance to divest from some assets, Sony alone will have trouble competing with so much muscle.
In FY23, Sony Pictures Networks India made over ₹6,600 crore (~$790 million) in revenue from operations while Network18 alone made a little over ₹6,200 crore (~$750 million) that same year. That year, Star India was the country’s largest media company with over ₹20,000 crore (~$2.41 billion) in revenue from operations in FY23, although its profitability dropped sharply.
Who even cares?
Sony and Zee do, but does Mukesh Ambani care all that much? Reliance may be getting a bargain deal on Disney, whose global management is determined to shed weak assets and focus on its domestic troubles. But in the grand scheme of things, Network18’s approximately $1.26 billion market capitalisation makes it an insignificant cog in the larger Reliance machine. “That’s nothing, Ambani’s cricket team will be worth more than that in 4-5 years,” the head of a Mumbai-based family office with media investments told The Impression, requesting anonymity. “My bullishness makes me rationalise that TV18 now being merged with Network18, along with the deal with Disney, should provide a fillip to the media and entertainment sector.”
Network18’s stock has been a slow performer on the bourses for years, and the company has been in the red for at least the last five years. Consolidation is probably the best way for everybody to beef up, especially as TV is bound to slowly lose its relevance even as there’s still little clarity on how to sustainably make money from online entertainment.
Reliance Industries’ massive balance sheet can probably help Network18 withstand the vagaries of time, but others in the business don’t have that luxury. If Sony and Zee don’t merge, it will only reflect how hard it is for anyone to make money in India’s media and entertainment business.
That is a shame, because this is one sector that has got foreign investors’ interest. In FY23, foreign direct investment in information and broadcasting surged nearly 2.5x in FY23 to over ₹3,700 crore (~$440 million). What’s the point if the biggest players are unable to close a deal, dogged by corporate governance issues and unable to unlock market value for investors?
Or as the head of the family office quoted above said “If Animal can gross ₹1,000 crore (~$120 million) revenue, how are these guys [listed media firms] so pathetically cheap?”
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Scan the big media headlines from the week gone by
Shiny, happy people: They’re not just the winners of this year’s Golden Globes, but the new owners of the prestigious awards as well. Two years after it first went off air and was then accused of an opaque voting system, the awards ceremony snagged 9.4 million viewers on CBS this week, up 50% year-on-year. That’s a great performance given how much this year’s host, comedian Jo Koy, struggled to keep it going. It also introduced a weird new category: cinematic and box office achievement, awarded to a film that made at least $150 million at the box office. This year’s winner was a no-brainer (Barbie).
Legal games: Over four months after the editor and HR head of independent media firm NewsClick were arrested under UAPA, the latter has turned approver. HR head Amit Chakraborty has been pardoned in exchange for information about allegations that NewsClick received Chinese funds to spread pro-Chinese propaganda in India. The allegations were made in this story from The New York Times profiling US businessman Neville Roy Singham and his Chinese connections; it made a passing mention of NewsClick.
Under siege: Journalists continue to die as they report on the ongoing war between Israel and Hamas in the Gaza strip. This week, an Israeli drone strike killed two journalists including Hamza al-Dahdouh, son of Al Jazeera’s Gaza bureau chief Wael al-Dahdouh, who has now lost four members of his family in the war. As of this week, more than 79 media professionals have died in the conflict zone since October.
Don’t lie: India’s consumer protection agency CCPA is drafting guidelines to restrain competitive exam coaching centres from making false claims of success in their ads. These will apply to both physical and online coaching centres. The industry is in dire need of reform; an investigative series by The Quint found that students struggling with the stress of exams in coaching centre hotspots like Kota are routinely dying by suicide, but local authorities aren’t willing to fix the problem.
Game on/off: Netflix is considering introducing in-app purchases and ads in its mobile games, The Wall Street Journal reports. So far, the streaming service has used games as a way to keep users coming back to its app.
Separately, TikTok owner ByteDance is moving away from its earlier gaming ambitions. Its gaming unit Nuverse is in talks with multiple buyers, including Tencent, to sell gaming titles. Meanwhile, Amazon’s gaming live-streaming service Twitch is cutting 500 jobs, about 35% of its workforce, to stem the company’s losses.
Dissecting this week’s viral ‘thing’
The jury’s still out on whether podcasting is hot or not, but it’s undeniably hot to get invited to a podcast. So much so that creators may be faking being on a podcast altogether.
Take this video by popular motivational speaker/creator Ishan Sharma. Here he is narrating a story about how he realised he shouldn’t squander away his father’s hard-earned money while on a date with a girl. Weird message aside, it’s hard to tell if Sharma is talking to a podcast host or simply rambling to himself while looking off-camera. There aren’t any longer video podcasts I could find where this clip could have come from, although it’s possible I missed it, or it simply isn’t available online. But I’m not alone in my suspicion that the whole Short is a fake podcast setup; one user asked Sharma the same thing in this video’s comments and this post also hints at Sharma (and perhaps other creators) resorting to such tactics.
So, is there any way to figure out if you’re watching clips of a fake podcast? This reporter suggests one way: listen carefully to see if the creator’s voice is coming directly from the professional microphone featured in the video. Although, a smart creator will know to sidestep that telltale sign.
What’s funnier (and a little worrisome) is that creators are now literally talking to themselves to convince us that they have something serious to say. Unsolicited advice: ditch the gimmicks and look for some insight. The audience will come.
That’s all this week. If you enjoyed reading The Impression, please share it with your friends, family, and colleagues. And please write to me anytime at firstname.lastname@example.org with thoughts, feedback, criticism or anything you’d like to see discussed in this space. I'd love to hear from you.
Thanks for reading, and see you again next Wednesday!