Zee-Sony Merger–Many Unanswered Questions
On 22nd September, there was a new twist to the Zee Entertainment Enterprises (ZEEL) drama when its board of directors granted in-principle approval to a merger with Sony Pictures Networks India (SPNI). More importantly, Punit Goenka, who the largest shareholder, Invesco Developing Market Funds (with an 18.4% stake) was trying to throw out, would continue as managing director (MD) of the merged entity.
 
The news set social media on fire with speculation about the machinations behind the surprise announcement. While Sony and ZEEL have made no comment, we have the strange spectacle of InGovern, a proxy advisor, apparently speaking for Invesco, in a series of tweets, soon after the merger plan was conveyed to stock exchanges. InGovern’s tweet said: “Sony comes in as a white knight for ZEE. Nothing wrong in 2 companies proposing a merger as CEOs can initiate merger discussions and then approach shareholders for vote. Invesco did not have alternate plan and, hence, it would be surprising if it is not supportive of this merger.” This raises serious questions. If Invesco had no alternate plan, what had it hoped to achieve in destabilising the company by seeking the sacking of the Punit Goenka and two other independent directors (Ashok Kurien and Manish Chokhani, who voluntarily resigned before the meeting)?
 
The timing and speed of the deal is extremely curious. Did Invesco know about Sony’s interest in ZEEL? Was its action only aimed at pushing the management to the wall and forcing them to accept the merger deal? More importantly, shouldn’t muscle-flexing by large institutional investors be based on a clear plan? This point is also made by JN Gupta, former executive director and founder of Stakeholders Empowerment Services (SAS). When I asked him about the merger, “How do I know that the next set of people the shareholder activist is appointing is going to be better than the present set? You have to give me a cogent argument. Just because you say there are governance issues, I don’t know if that is the case.” Given the two situations—Invesco’s proposal to throw out Mr Goenka and the Sony deal—he would go with the merger, since it provides a clear roadmap for the company.
 
InGovern’s tweet says, “As a Fund, Invesco would be interested in financial returns and clean governance. With Sony as a majority shareholder, and a likely reconstituted Board, the merged entity would be the best solution Invesco could have hoped for. Punit Goenka's capabilities as MD of a leading media company was not questioned. Invesco was unhappy about the governance of Zee due to the group company issues. So, Punit Goenka as the proposed MD of the merger entity should not be a concern.”
 
This seems rather ingenious. Seeking the removal of Punit Goenka and two ‘independent’ directors is hardly a vote of confidence for his abilities. Moreover, problems with the “governance of Zee because of group company issues” remain unresolved since he continues to be the MD. Indeed, Sony as the majority stakeholder, will have its own directors; but, given the group’s political clout, this is such an unprecedented situation, that one has to wonder about what makes the proxy advisor confident about future developments. Remember, we don't know what had irked Invesco in terms of influence of group entities or why it wanted two independent directors to be removed.
 
InGovern in another tweet goes on to say, “Also, Invesco could well just withdraw its EGM call” and further, “(S)o, probably for the first time in India, we are seeing activism where a Fund triggered an action which is pushing the company into a merger. Shareholder Activism in Corporate India has come of age.”
 
Actually, it is premature to celebrate this as ‘shareholder activism’. Many shareholders, large and small, are confused—even while they are happy with the outcome and especially the 32% surge in the ZEEL price and predictions about it suddenly turning into a ‘super blue-chip’. It is also strange that the news of Punit Goenka’s ouster caused the stock to surge 40% and his continuation as MD in the merged entity is also being welcomed equally. Doesn’t this contradictory narrative seem to be deliberately orchestrated? 
 
Although ZEEL’s capital structure and the controversial machinations of its founder Subhash Chandra have few parallels in corporate India, shareholders have many questions. Was Invesco’s game plan just to push ZEEL into a merger? Those who have tracked the capital market for the past three decades see a lot of perplexing connections between three people who are close to each other – Manish Chokhani exiting the board; Rakesh Jhunjhunwala investing 1% in the company a day before the merger announcement; and Vallabh Bhansali making a rare TV appearance to call ZEEL-Sony a future blue-chip. Unfortunately, unless the regulator digs up something using its vast powers and tech resources, these questions may never be answered.
 
One market-watcher, who calls it a jigsaw puzzle, asks why have large investors ignored the fact that ZEEL’s promoters are an exception in India, having cut their stake to under 4% in order to bring in funds and pare the outstanding debt of over Rs11,000 crore? The counter to this is that ZEEL was not only profitable, but the group’s enormous political clout is entirely derived from the media empire. It is also a moot question whether Mr Goenka will remain MD over the long term, or this is just a face-saver for him with multiple benefits on both sides. 
 
There are speculative media reports that there may be no open offer to retail shareholders since the ZEEL-Sony deal is a merger and not a ‘takeover’. Decisions of the Securities and Exchange Board of India (SEBI) on what triggers an open offer have been capricious in the past;  so, it will be interesting to watch what transpires. Will Mr Goenka’s continuance be used to claim there is no change in management control which would trigger an open offer? Can SEBI ignore the fact that Sony, as a majority shareholder, will have effective control? Meanwhile, the face-saver in ZEEL may also help the group ward off action shareholders had threatened to take in group entities such as Zee Learn and DishTV. 
 
Role of Proxy Advisors
A curious aspect of the ZEEL-Sony situation is the aggressive role of proxy advisors as is evident from the series of tweets by InGovern on what Invesco would do. I have emailed Invesco for clarity and this article will be updated when we hear from them. 
 
Just before the merger with Sony was announced, an article in zeebiz.com, which is part of the Zee media group, had raised ‘questions’ about emails of Amit Tandon, MD of another proxy firm, Institutional Investor Advisory Services (IiAS). “Zee Media has details of the emails between Amit Tandon and a few investors which clearly raises suspicion whether IiAS and Amit Tandon are conspiring against the Essel Group?,” says the article. It also questions whether this strategy will extend to other entities of the Zee group.
 
Meanwhile, IiAS has said the ZEEL-Sony deal will be good for the industry and shareholders. It expects Sony to ‘control the purse strings’ and bring in a new chief financial officer for the merged entity. And that “Punit Goenka will be reporting to a different board—a majority of which will be nominated by Sony,” reducing the “risks of related-party transactions and governance failures.”
 
While shareholder activism is a good thing and proxy advisors have played an important role, it would be worrying if their role extends beyond helping large institutional investors fulfil their fiduciary duties and taking the right stand on corporate resolutions that need shareholder approval.
 
When asked, JN Gupta says, “We as a firm will never speak at the prodding of any company or investor. Also, we will only go by published information, we have no friendship with anyone. Our approach will be to take a stand only when we know specific facts.”
 
As of now, no one seems to know all the facts of this deal; but the quick turn of events, which were initially welcomed, are now raising a lot of questions.
 
 

Comments
suketu
3 weeks ago
Zee's director Kurien oust by shareholders.Interestingly Yes bank wants this same Kurien out of Dish TV in 2 days time.Something very fishy about Zee /Sony deal as pointed out by moneylife.
amitanam
3 weeks ago
RJs father was IT commissioner, in the 90s, RJ used to get advance tax figures in advance and used That to punt on stocks to make money.
Pradeep Deb
3 weeks ago
Finally, someone called out \"ace investor\" Rakesh Jhunjunhwala! Something I had been wondering for years. Watch his interviews to understand his \"investing\" secret - the blessings of God and prayers of his parents! Only in India! If you have enough money, no one will question you. Shocking to see mainstream media outlets blindly carrying obviously manipulated/paid \"news\" about his buys and sells which the gullible and greedy new generation of retail stock market entrants lap up. What a travesty of value investing principles! Crooks like these are in cahoots and rule every aspect of our public life.
suketu
Replied to Pradeep Deb comment 3 weeks ago
Vijay Kedia is the real deal as far as ace investors to emulate.His theories and principals superb.Moneylife called him 4 yrs ago.Superb thoughts .I still remember it.
drbheda
Replied to suketu comment 6 days ago
Agree with you totally
shrikrishnayprabhu
Replied to Pradeep Deb comment 3 weeks ago
Agree, Crooks like ZhunZhun are the WORST type who get away with daylight insider trading ????????????
david.rasquinha
3 weeks ago
Not holding my breath waiting for SEBI to awake from its slumber.
antargat420
3 weeks ago
I always found it amusing (hilarious actually) when people touted Rakesh Zhunzhunwala as India's "Warren Buffet". There is a zameen-asman ka difference between them. Rakesh Z is nothing but a 2 bit insider who made and multiplied his fortune on nothing but slimy, insider deals and information. That SEBI is no SEC when it comes to prosecuting insiders is no secret. So any gullible investors that wanted to follow the Rakesh Zhunzhunwalla approach to "investing" - sorry guys, that won't work, because there is no such approach. It is best to stick to the general approach followed by Charlie Munger and Buffet, to seek out value in companies, yourself.
saharaaj
Replied to antargat420 comment 3 weeks ago
Not warren Buffett but Harshad Mehta and Ponzi merged
bhardwajsat
Replied to antargat420 comment 3 weeks ago
RJ is an insider trader and Buffet is a holy cow! Wow! Study Buffet's bets first and then draw conclusion. Come out of your inferiority complex vis a vis white people! As far as his bet in Zee is concerned, it seems to combine of patriotism and profit, same as Buffet made bets during sub-prime mortgage crisis! Both Subhash Chandra and RJ are nationalists and it seems RJ wanted to help him ward off pressure from a fund where Chinese have some influence!
shrikrishnayprabhu
Replied to antargat420 comment 3 weeks ago
Agree, Crooks like ZhunZhun are the WORST type who get away with daylight insider trading ????????????
krish.queries
Replied to antargat420 comment 3 weeks ago
@antargat420 - Absolutely spot on, your views on Rakesh Jhunjhunwala, he is just an insider trader who's made big bucks with slimy deals and has now grown too big for anyone to touch him
dayaka58
3 weeks ago
So manipulators are pervading Shareholder activism also.
drbheda
3 weeks ago
Continuation of the CEO is only to make it look like a merger & not a takeover. Overall everything is stinking, including the appearance of Mr Bhansali & praising Mr Goenka
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