‘Growth’ and ‘Value’ are two key metrics that make a company relevant to its management, shareholders and consumers. There are many ways by which companies can grow and provide value. An effective way to do this is by following the time-tested mergers and acquisitions route.
Mergers and acquisitions indicate there is ‘value’ in an industry. This value aided by a merger or an acquisition could translate into the ‘growth’ of a company in that sector. The recent merger of India’s largest media and entertainment company Zee Entertainment Enterprises with Sony Pictures Networks (SPN) reflects this. Let us understand the nuances of this mega deal.
How does the Zee-Sony merger add value?
In the past five years, content consumption patterns have witnessed considerable change. Television is no longer the only medium for content. The advent and rapid acceptance of streaming and social media platforms have changed the ways in which content is created by the media and entertainment industry and consumed by viewers. Easy access to high quality content from domestic and foreign sources has changed consumer tastes. Formulaic plotlines are not resonating anymore with television or film viewers. This is one of the key reasons why streaming platforms are finding paid subscribers.
Not surprisingly, India’s television industry, too, is facing intense competition from streaming and social media platforms. The need of the hour is to re-invent, revamp and create new content. Besides this, if a company can grow in scale and operations through either merger or acquisition, then it must be done. The merger of ZEE and SNP is a step in this direction.
Solution to Zee’s corporate governance issues?
The merger of Zee Entertainment Enterprises (ZEE) with Sony Pictures Networks (SPN) plugs several issues with ZEE’s operations. ZEE’s promoters in the past few years had invested in non-media businesses. One of them was infrastructure projects. Losses in these projects stretched the company’s balance sheet to such an extent they had to pledge shares of the company. After settling the debt, the promoters’ stake in the company stands at 4% presently.
The merger’s structure also addresses the corporate governance issues that have dogged ZEE. Sony and institutional investors will play a bigger role in the new entity’s management and board while Punit Goenka is slated to look after operations.
In the new entity, Sony Pictures will hold a 53% stake and ZEE will have a 47% stake. ZEE’s promoters would hold close to 4% of the new entity. They could increase their stake up to 20%. This means that the promoters will continue to have a meaningful role to play in key decisions related to the company.
Win-win for Sony & Zee?
A notable aspect of this merger is that it is complementary in nature: What ZEE lacks, Sony possesses.
This is key to analysts, who were concerned that in addition to “corporate governance”, the company’s core television business was also losing share of viewership. In the pandemic period, Zee’s viewership in primetime slots had fallen. In the GEC or general entertainment channel space, Star and Colors have gained market share. Zee has been unable to revamp its old shows. It did not have reality or highly-watched non-fiction shows. It was also unable to earn incremental viewership despite launching a few shows. Sony, on the other hand, acquired the sports channel of Zee in 2018 and revamped it. Today, sports offerings and kids content are valuable assets of Sony.
Hence, as per reports, the merger creates a bigger entity which will have close to 30% of the total viewership market share of India’s entertainment industry. This will make the merged entity the largest player by viewership market share. Presently, ZEE has 17-18% and Sony has 11-12% of the total viewership market share.
The merged entity will also be cash-rich. Post-merger, the new company would reportedly have cash amounting to Rs.12,000 crore on its books. A large portion of these funds will be used to produce content for the streaming platform of the new entity. This will ensure the long-term relevance of the entity in the entertainment industry. The new entity also boasts an enviable mix of Zee’s popular and highly-watched film library and regional content along with the sports and non-fiction content of Sony. In subsequent quarters, the new entity can command high bargaining power with telecommunications companies, advertisers and other platforms in selling their content.
Last Word
This merger is also an indicator of the future path of India’s media and entertainment industry. And that future path is CONSOLIDATION. A case in point is the OTT segment. The segment currently has more than 35 players. Analysts and experts believe that the segment will see more mergers and acquisitions in the near future. They point out that only through consolidation can businesses in the industry become more sustainable and relevant, for stakeholders and for consumers.