In today's Finshots we talk about the merger between Zee Entertainment and Sony Pictures India and see why investors are excited about the company's prospects


The Story

Before we get to the merger, we have to talk about Zee Entertainment. And you can’t talk about Zee Entertainment without taking a trip back to 2019 when the headlines read— “Subhash Chandra, Chairman of Essel Group To Lose Control Of Zee Entertainment After Stake Sale.”

This headline is important because if you’d told somebody a few years earlier, that such an event would transpire, they would have laughed at you. There was no way on earth, the enigmatic media baron would have ever lost control of Zee. But as fate would have it, he did lose control of the massive entertainment empire (at least sort of).

And this is where this story really begins to take shape. But let's take it from the top.

For the uninitiated, Subhash Chandra (through Essel group) had owned most of Zee Entertainment for as long as the company had existed. It was the founder’s brainchild and one of his most prized possessions, and Zee for its part continued to mint millions for the group.

However, Essel Group had other ambitions. Most notably, they wanted to get into the whole Infrastructure game when it was hot. Only problem — It was a bit too hot.

Essel borrowed large sums of money to fund extravagant projects and they did this by offering shares of Zee Entertainment Limited as collateral. Unfortunately, that little program didn’t work out as intended. Instead, the promoters of the Essel Group were left with unpaid loans to the tune of billions. And about the same time, Zee shares also started taking a beating and the value of the collateral began dropping precipitously.

And this is where things get a lot more interesting. Lenders who extended money to the Essel group were caught in a bit of a dilemma. As the collateral began to lose value, they had to start considering their options — Choose to sell the shares out in the open and risk denting the price further or wait until Essel somehow came good on their commitment. They decided to play the waiting game for a while. But when Essel Group defaulted on some of their obligations, a few lenders went out in the open and began selling Zee’s shares in a bid to salvage what they could. The stock price crashed 30% and there was pandemonium in the streets. People couldn’t believe what they were seeing. If more lenders had got in on the act it would have been a massacre out there. The collateral would have been worthless. However calmer heads prevailed and despite the ominous signs surrounding Essel and Zee, other lenders chose not to sell shares out in the open.

In the meantime, Essel had to work out a deal to pay back their creditors in full. They sought an extension and after a bit of back and forth, they finally managed to come good by selling a sizeable part of their stake in Zee Entertainment to Invesco Oppenheimer Developing Market funds — who then became the single largest shareholder in the company. In the meantime, Essel Group saw its shareholding drop to a mere 5% and Subhash Chandra, the billionaire chairman of the group lost control of Zee Entertainment Enterprises.

But here’s the thing — The company was still being run by Subhash Chandra’s son Punit Goenka. And investors weren’t too happy with how things were panning out. As a report in Fortune India notes — “The company has frequently been in the news on charges of tax evasion, siphoning off funds to various promoter entities and other corporate governance issues which has not augured well with the institutional investors.”

So there were rumours that the other investors would oust Punit Goenka and all but eliminate Subhash Chandra’s influence. In fact, these reports alone helped the company’s share price surge by about 40%. But then in a sudden turn of events, Zee Entertainment announced that they’d be merging operations with Sony Pictures India (after due diligence) and Punit Goenka would continue to lead the merged entity.

So at this point, Zee investors will be entitled to shares in the merged entity (if all goes through), Sony will have the opportunity to increase its presence in India some more, and Punit Goenka will continue to call the shots. More importantly, shareholders will be expecting more oversight this time around considering Sony will have a majority stake in the combined entity. And together, they'll be hoping to see the company thrive. So yeah, that’s the reason Zee investors are hyped right now and we will see you tomorrow.

Until then...

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