After Sony Split, Zee Plunges into a Cloudy Future. What Does It Say about Investment Savvy of Mutual Funds?
After just over two years of high drama, Sony Pictures Networks India (now called Culver Max Entertainment) finally declared 'The End' on its merger with Zee Entertainment Enterprises Ltd (ZEE) on 22 December 2021.
While the biggest foreign investors exited, guess who did not anticipate this outcome and picked up all the shares dumped by foreign institutional investors (FIIs)? Yes, sahi hai, for those who guessed correctly—Indian mutual funds (MFs) picked up all the stock dumped by FIIs in the past two years.
When the merger was officially terminated on Monday, and ZEE collapsed 33% on Tuesday (23 January 2023), domestic institutional investors (DIIs), mainly Indian MFs held a staggering 43.42% of shares – while the ZEE promoters held a mere  3.99%. Notably, MFs have been persistent buyers through the tumultuous two-year saga, which saw punitive action against the founders by the market regulator, litigation with FIIs, bankruptcy proceedings and competition commission referrals.
ZEE made headlines in September 2021, when Invesco Developing Market Funds, holding an 18.4% stake, raised governance concerns and dramatically demanded an extraordinary general meeting (EGM) to remove Punit Goenka—the founder's son—as managing director (MD) along with two other directors—Ashok Kurien and Manish Chokhani (who voluntarily resigned immediately afterwards). The behaviour of different groups of investors, since then, has been intriguing, as is clear from the table below.
Domestic MFs now dominate the Indian market, pooling ordinary investors's savings to provide expert investment. Despite constant merger uncertainty and allegations from various investors and creditors like JC Flowers and IDBI Bank, MFs increased their combined holding from just under 16% in September 2021 to a massive 43.42% in December 2023.
By December's end, ICICI Prudential Value Discovery Fund had emerged as a significant supporter of the ZEE stock, first acquiring a substantial 6.44% stake in December 2022 and now holding 7.25%.
HDFC Mid Cap Opportunities Fund picked up a 4.61% stake in ZEE as recently as in June 2023 – raising its holdings to 5.26% by December 2023. Nippon Life Multi Cap Fund secured just under 3% in March 2022 and has steadily increased its holdings since then. Evidently, these funds must know something others don't.
Life Insurance Corporation of India (LIC) has kept its faith in ZEE all through. It marginally increased its 2021 holding of 4.89% to 5.12%. While several MFs have sold their entire holding, recent buyers include HDBC Value Fund, Kotak Equity Arbitrage Fund, SBI Life Insurance, and Tata Large and Mid-Cap Fund.
FII Holding
In contrast, FII holding dropped from a high 64.15% in September 2021 to 35% in September 2023 and further to 28.19% in December 2023. The largest holder, Invesco dumped its 7.74% stake in June 2022, despite the big surge in ZEE's price after the merger announcement. Many others have trimmed their holdings or exited the stock. Interestingly, the retail investors seem to be gung-ho about ZEE. Their combined stake, which had dipped from around 22% to 18% as recently as September 2023, has shot up to 24.25% by December.
Let's look at where each stakeholder stands. Sony Picture's faith in the ZEE promoters was always perplexing, given the controversial actions that forced a reduction in their shareholding and the nasty fracas with Invesco. The deal appeared shaky months before Sony officially terminated it and demanded US$90mn (million) for alleged breach of the merger co-operation agreement (MCA). ZEE denies the charge, potentially leading to more litigation.
Initial reports suggest the deal collapsed due to ZEE's insistence on Puneet Goenka managing the company. Now, finding another white knight could be an option to salvage the situation. The company is already facing a cash crunch. In January this year, ZEE failed to pay US$200mn to Walt Disney India for television rights to cricket matches.
Earlier, in October 2022, it had agreed to shed some of its businesses under orders from the competition commission of India (CCI) over concerns of market dominance following the Sony-ZEE merger. The group also owes money to several institutions who had extended loans to it based on personal assurances of the founder.
Where does ZEE go from here? Given its past record, founder Subhash Chandra has invariably managed to extricate himself from a tight spot and bounce back. The founder also retained viewer interest in their channels even when their financial misadventures and investment in unrelated businesses, such as infrastructure and gold mining, forced the group to pare their shareholding. However, with the family stake below 4% with a large outstanding debt, the room for manoeuvre has shrunk significantly. ZEE is already facing bankruptcy action from creditors such as IDBI Bank and JC Flowers.
A corporate lawyer says the way forward would be to find a new white knight quickly. There are only two big players with deep pockets on the horizon—one is the Mukesh Ambani group, which was previously interested in a deal with ZEE, and the other is Adani which seems keen to expand its already large media footprint.
In October 2021, Invesco had disclosed that it had tried to play match-maker with Reliance, which was willing to a deal where Mr Goenka would continue as MD, but the negotiations fell through.
But the situation is vastly different for ZEE in 2024 as it is financially much weaker. Moreover, the Securities and Exchange Board of India (SEBI) continues to be on its trail. SEBI dealt a serious blow to ZEE in 2023 when it restrained Subhash Chandra and his son Punit from holding a directorship or key managerial position (KMP) in any listed entity after charging them with diverting funds through an interim order in June 2023. Although the securities appellate tribunal (SAT) set aside the ban, providing fresh hope for the ZEE-Sony merger, the SEBI investigation has continued.
In an earlier order, in connection with Shirpur Gold Refinery Ltd, SEBI barred  Amit Goenka (Subhash Chandra's son) and six others from selling, disposing of or diluting their shareholding in the company. The charge was a misrepresentation of facts and diversion of funds. (Read: Subhash Chandra: Brilliant Entrepreneurship, Dodgy Business Practices & Nine Lives).
In a fresh report on Tuesday, CNBCTV18 says SEBI has almost completed the investigation against ZEE and is likely to accuse Punit Goenka of siphoning nearly Rs800 crore to Rs1,000 crore. Even if ZEE contests these orders, there will be a cloud over the founder's future until the issues are finally disposed by the Supreme Court of India. This makes the quest for a white knight who will allow the management to remain in charge more challenging. However, ZEE's media footprint and reach make it an attractive acquisition for a potential buyer – without the baggage of the founder's legal troubles.
So Sony Pictures is out, but as far as ZEE is concerned, 'picture abhi baki hai'. Will the grand climax be the end of the road for a brilliant entrepreneur who took one risk too many? And what does it say about the ability of Indian MFs and their managers to read the corporate box-office? Did they bet on a company with a chequered history expecting to make money for investors?
Remember, we are in a huge bull market, and DIIs chose to bet on a stock that has been on a constant slide from a high of around Rs600, way back in January 2018 to around Rs290 even before the merger was cancelled. The signifance of this becomes evident when you note that the benchmark Nifty, which was around 11,000 in January 2018 has climbed to over 21,600 on 22 January 2023.
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