Sony’s spurned target shows the pitfalls of tempting Indian M&A

By Andy Mukherjee

Sony Group Corp. dodged a bullet when its lawyers nixed a $10 billion Indian merger that executives had spent two years trying to bring to fruition. The spurned target hasn’t been as lucky. Zee Entertainment Enterprises Ltd. has no other suitors on the horizon, and its founders’ mounting legal troubles are threatening to engulf the firm.

To foreign investors, the Sony-Zee saga is a reminder of the need to approach Indian deals with an abundance of caution. In 2008, Daiichi Sankyo Co. shelled out $4.6 billion to buy Ranbaxy Laboratories Ltd., a generic drugmaker, from New Delhi-based brothers Malvinder Singh and Shivinder Singh. Shortly after, US regulators barred more than 30 drugs made at two of the Indian company's plants and halted reviews of new products at one of the factories because the firm had falsified data. Daiichi got pulled into a rabbit hole to win an arbitration award against the brothers for suppressing facts, and then to get it enforced.

Sixteen years later, governance at many Indian family-controlled firms isn’t any better. The market watchdog, which is investigating Zee’s founder Subhash Chandra and his son Punit Goenka, the chief executive officer, for siphoning funds from the publicly traded firm, has found a Rs 20 billion ($241 million) diversion, roughly 10 times bigger than what was revealed to a preliminary probe.

The near-15 per cent slump in shares that followed the Bloomberg News report — denied by the company as “incorrect, baseless and false” — puts the onus on the father-son duo. They have an opportunity to tell their side of the story to the Securities and Exchange Board of India (SEBI) before it finalizes its report on alleged governance lapses by April. Yet, what Zee actually did was to blame the “negative public opinion” on misinformation. On Friday, the board set up an advisory panel to curb “erosion of investor wealth.”

The time for fighting words is long past. The very survival of India’s oldest private television franchise is at stake. For one thing, Zee had about $100 million in cash in December. Sony has initiated arbitration proceedings in Singapore against it, seeking a $90 million breakup fee.

Second, the Mumbai-based firm skipped a $200 million payment to Walt Disney Co. last month, citing a liquidity crunch. This is part of a $1.4 billion license agreement with Disney to telecast some cricket matches for which the US entertainment giant holds the rights.

Wriggling out of the arrangement may not be financially painless for Zee. Disney has just entered into a binding pact with Mukesh Ambani’s Reliance Industries Ltd. to combine their Indian media operations. Asia’s richest tycoon, who is expected to own at least a 61 per cent stake in the merged entity, might insist that Disney extract as much out of the contract with Zee as possible.

The third crucial issue is the control of Zee’s affairs by a shareholder group with less than 4 per cent ownership. Sony wrongly thought that the best way into the marquee asset was to be Chandra’s white knight. Its merger proposal even gave the founding family the option to raise its depleted shareholding to 20 per cent.

Luckily for Sony, the SEBI’s preliminary report, alleging that Zee had faked the recovery of loans owed by founder Chandra’s private entities, came before the merger had been concluded. The father and son are contesting the SEBI’s findings, but honoring the agreement to let Goenka helm the merged entity became impossible with the sword of regulatory action hanging over the Zee CEO. The transaction collapsed in January.

But while Sony might have gotten away by the skin of its teeth, Zee’s finances are deteriorating. Annual profit has fallen by 95 per cent, its content inventory is shrinking, and the network's 17 per cent market share is holding up only at the expense of profit margins. And that brings us to a fourth point: The competitive landscape has changed vastly from when Sony and Zee shook hands in 2021. A Disney-Ambani marriage is set to create a formidable No. 1., with a complete lockdown on cricket in a country crazy about the sport.

Meanwhile, Zee will struggle in the absence of the fresh capital that Sony was proposing to infuse. A new suitor is the only other option. The acquisitive tycoon Gautam Adani fits the bill of someone who may relish the competition with arch rival Ambani. Now that the infrastructure czar has seen off allegations of governance lapses at his own transportation and energy empire, he may not be averse to establishing a foothold in India’s consumer economy with telecom and media, where Ambani calls the shots.

Still, Adani may not want to step into the breach until the legal and accounting dust around Zee has settled. (In that case, Sony, too, may want to return to the negotiating table.) But the chances of a good outcome are fading fast. Investors voted down the reappointment of two directors in December, while another withdrew his nomination. Shareholders, who have seen a franchise worth $9 billion in 2018 collapse to $2 billion, are unlikely to be satisfied with the latest campaign to reestablish credibility by a board that is itself grasping for legitimacy. The company that brought private satellite TV to India may be remembered as another Ranbaxy: a warning to foreign buyers to curb their enthusiasm.

Perhaps the only kind of mergers and acquisitions that makes sense is where a multinational such as Disney inherits a good Indian asset from another — like Rupert Murdoch’s 21st Century Fox Inc. — and flips it over to a prominent local billionaire, keeping a minority stake to ride the upside. Selling control to Indian families may be a whole lot easier than buying it from them. Taking a leaf from Disney CEO Bob Iger’s playbook, it may not be a bad idea for Sony to invite Adani as a majority partner in its local media operations. Otherwise, the Japanese network will find itself fighting Ambani all alone — minus the added heft of a Zee merger.