What does the end of Zee-Sony merger mean for the media landscape?

After an over two-year-long saga, Sony Group Co. announced its decision to terminate its merger with Zee Entertainment Enterprises’ India unit on January 22. In a press statement, it mentioned that the ‘closing conditions to the merger were not satisfied by the end date’. 

In response, Zee has announced its intention to pursue legal action against the Japanese company. It has also refuted all the "claims and assertions" made by Sony regarding alleged breaches on its part and denied its claim to termination fees of USD 90 Million.

Bringing together 75 channels, two video streaming services (Zee5 and Sony LIV) and two film studios (Zee Studios and Sony Pictures Films India) under a single umbrella, the merger was expected to create the largest media conglomerate in the country. With Disney Star and Reliance also in talks for a merger, experts say both parties are set to be affected by the termination of the merger.

Ashish Bhasin, founder, The Bhasin Consulting Group, says the failure of the merger is not favourable news for either Zee or Sony and if it would have completed the process it would have made sense for both broadcasters.

"A merger between Zee and Sony would have been beneficial for both, especially with the emergence of a strong competitor in Star and Viacom joining forces. The combined entity, with platforms like Zee5 and Sony Liv, could have effectively countered this competition, leveraging Zee's robust regional content and Sony's extensive film and global content library," he says.

Paritosh Joshi, an independent media and communication consultant, says the setback for Sony is significant as they miss a crucial opportunity to grow in India and the regional market through Zee's acquisition. 

The exit of Disney from linear TV globally is also believed to be influencing Sony's strategic decisions. Joshi suggests that there could be undisclosed deals influencing their decision and this move is part of a larger strategic intent, possibly extending beyond India.

"The move raises questions about Sony's global television business, operating from California, especially in the context of evolving preferences for non-linear content. Investors and analysts may be pressuring Sony to reevaluate its linear assets, considering the changing landscape. The idea of selling Indian linear TV assets might align with a broader reevaluation of Sony's focus and potential exit strategy. With interested Indian businesses having deep pockets, an attractive exit for Sony's linear TV business could be feasible. After over 30 years in the Indian market, Sony may be contemplating a shift towards digital platforms rather than traditional linear TV. The exact motivations behind this decision remain unclear," he adds.

Karan Taurani, SVP - research analyst (Media, Consumer Discretionary & Internet), Elara Capital, says, the termination may hit both parties as both are facing stiff competition from digital media and a potential threat from the Disney- Viacom merger. 

“Zee has reported muted growth/ profitability performance in the past two years, as revenue growth has converged and its EBITDA margin dipped to 10.7%, due to losses in the OTT segment and lower growth in linear TV segment,” he says. 

However, Bhasin believes that consolidation is inevitable, whether this specific merger proceeds or not.

"In certain genres, such as news, with numerous channels, the case for consolidation is apparent due to efficiency and cost considerations. For broadcasters, high costs are involved in both content and distribution for broadcasters. Consolidation enhances clout with advertisers and distribution channels. While this particular merger might not be happening now, in business, one should never rule out the possibility. Whether through a friendly process, acquisition of shares, or a global hostile takeover, business outcomes are unpredictable," he adds.

Joshi says the end of such processes is not straightforward. "Terminating it with a single letter, citing an inability to extend further, seems legally complex. Zee has already decided to legally challenge this, indicating a protracted legal battle. The process of separating the entities, if they choose not to merge, won't be simple either. Company mergers involve intricate issues, and it's not as straightforward as sending a termination letter," he says.

Taurani predicts that Zee could see a hit from related penalty/ legal proceedings due to its battle with Sony over the non-compete fee, the ongoing legal proceedings by various creditors of the Essel group and also the dishonouring of contract with Disney.

“Zee had also signed a contract with Disney for a sub-franchise of sports rights (ICC tournaments) in linear TV. It may now not be able to fulfil this commitment as it was entered into given its strategic-synergistic contiguity with the Zee-Sony merger,” he adds.

Joshi suggests that for Zee, with diverse businesses and international presence, demerging or selling specific assets is plausible to address potential cash flow issues.

"While the failed merger is a setback, it doesn't signal the demise of the substantial business. There's room for strategic restructuring and growth. Additionally, another suitor may emerge, given the media industry's interconnected nature. Players in the business are well-connected, and a new opportunity could arise, even if one has left the scene. The media landscape's dynamics allow for potential rebounds and alternative paths," he says.

Meanwhile, Bhasin is confident that Zee will soon find a solution that aligns with its goals.

"While the failure of the deal may temporarily affect morale, it is a strong organisation run by experienced personnel, and has a strong brand position, so they will rebound. In the long run, they are expected to find a solution that aligns with their goals," he says.

"Certainly, facing a setback after dedicating two years to a merger can be disheartening. The channel group, with a strong presence in India, boasts regional penetration and a robust history. Despite the short-term setback, as an established business, they are likely to devise strategies for recovery. New suitors and investors may emerge, presenting various possibilities."

Joshi sees a silver lining. In the realm of entertainment, which lacks FDI restrictions, the termination doesn't just limit possibilities domestically but also opens up doors for international prospects.

"This saga isn't concluding anytime soon; the media industry is a perpetual cycle of mergers, divisions, and consolidations. Today's termination might seem like the end, but in this dynamic business, it's just another twist. The media landscape thrives on constant evaluations, acquisitions, and mergers, making it an ever-evolving and interesting industry," he shares.