Zee Sony Merger has a $100 Million Catch

The Zee Sony merger at $7 billion may be the biggest merger in the Indian media space till date. However, like most such large merger and acquisition deals, there is a penalty clause on both the parties if they subsequently decide to walk out of the deal. This penalty will be payable by Zee or Sony, depending on whoever walks out of the deal.

The existence of an exit penalty was confirmed by Vikas Somani, who heads mergers and acquisitions at Zee Entertainment. While Vikas just confirmed the existence of the exit penalty clause, informed sources have reported that the exit penalty could be in the range of $100 million or Rs.750 crore approximately. 

However, this penalty will only kick in after the regulatory approvals and shareholder approvals are through. The penalty clause will not apply in case the deal is not able to clear the shareholders or the regulators. Zee is yet to confirm when it plans to convene a meeting of shareholders to seek approval for the merger deal.

At a regulatory level, there will be multiple levels of approvals required. The NCLT will have to approve the deal as is the norm for all such deals. In addition, the approval of SEBI and the stock exchanges will be required, apart from approval of the Competition Commission of India (CCI). Also, both companies being media companies, explicit approval from the Ministry of Information and Broadcasting will also be required.

Post the merger, Sony will hold nearly 51% in the merged entity while shareholders of Zee will hold 45%. The Essel group (Subhash Chandra Family) will hold 4%. This 4% stake in the bigger equity base will be due to Zee being paid Rs.1,100 crore as non-compete fee by Sony. This will be converted into a 2% stake in the merged entity taking Essel stake to 4%.

The big question mark is over the approval by the largest shareholder of Zee, Invesco, that owns 17.88% stake in Zee. Invesco had called for the removal of Punit Goenka from the post of CEO of Zee and appointment of 6 of its nominees to the board. However, Zee had refused to convene an EGM to vote on this proposal. It is yet not clear whether Invesco will vote for the merger or against the merger.

Eventually, it could boil down to Zee getting the buy-in of the other institutional shareholders to see the merger through. Once the merger is approved, the exit clause could be a roadblock for any future rethink.
 

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