Opinion: Quick View on SAT allowing Punit Goenka as CEO of ZEE/Sony merged co.

As per media reports, Sony does not want Mr.Punit Goenka to head the ZEE/Sony merged co., amidst the ongoing SEBI investigation which will continue despite interim relief from SAT. We believe this is as per two scenarios we pointed out earlier. Scenario 1: Merger process expedited with clarity over Mr.Goenka. Scenario 2: Sony not in favour of appointing Mr.Goenka as CEO amidst the ongoing investigation.

Legally, we don’t foresee any challenge in appointing Mr.Goenka as CEO, post the relief by SAT – as indicated by primary checks with legal experts too. However, as Sony is the majority in this merger, they may decide to appoint someone else due to this investigation; there is a high likelihood of Sony appointing someone internally to head the merged company.

There is minimal impact of the above move (change in CEO) eventually, as appointment of a new CEO will require a mere shareholder and Board approval; as mentioned earlier, we don’t foresee big delays beyond a point for the merger and the process could end over next eight to 12 weeks, as Sony may not wait longer than that. Hence, we don’t even expect a big delay as such on the merger due to this move. Expect a larger transition time in business synergies in case of Sony acquiring ZEE without Mr.Goenka, due to a potential new management for ZEE.

Albeit the above: 1) Business synergies 2) Superior Corporate Governance Practice 3) Scale in OTT remain the drivers for the merged company and this could drive superior valuation multiples.

Various scenarios that could emerge basis the above: If Mr.Punit Goenka changes his stance and wants to remain CEO of the merged co. post SAT approval or keeps his stance (not wanting to become CEO).

Scenario 1: Sony may back out – merged called off  (Probability 20 pc)

In case of Mr.Punit Goenka wanting to be the CEO of the merged co. and Sony not agreeing upon the same, it may lead to Sony backing out of the merger. We believe the probability of this event seems very low, as the merger is very important for ZEE shareholders and the Goenka family; also, Sony may struggle to scale up in a market like India in case Disney is acquired by Reliance. We believe Sony too is equally eager for the merger as ZEE is, as the linear TV and OTT market has turned disruptive.

Scenario 2: Mr.Goenka remains CEO of the merged co. (Probability 10 pc)

In this scenario, Sony may allow Mr.Punit Goenka to remain as CEO and have their own finance, operations team for day to day affairs, with a majority on Board by Sony. However, given Sony’s MNC culture, this may seem to be a low likelihood event, unless they legally need to do it (as per term sheet of the merger) and cannot back out of the merger; Sony may not want to have a CEO on Board, who is under a SEBI investigation.

Scenario 3: Mr. Goenka may be offered board seat, but not CEO role (Probability 30 pc)

In this scenario, Mr.Goenka may be offered a Board seat in the merged co., but not a CEO designation, until the outcome of investigation is known. This in turn may lead to superior corporate governance practices in ZEE, with change in finance and operations team post the merger by Sony. This could potentially be a win-win for both parties, if mutually agreed upon. Further, Mr.Goenka may also ask Sony for a higher non-compete fee in case he plans to step aside of ZEE and not become CEO. We believe the probability of this event is on the higher side, as Mr.Goenka may eventually agree to be on Board in the interim, until the outcome of investigation is known with a higher non-compete fee.

Scenario 4: Merger goes ahead without Mr. Goenka (Probability 40 pc)

In this scenario, Mr. Punit Goenka agrees to step aside as CEO if Sony decides to call off the merger; Sony may continue to run its India operations if the merger is called off, but ZEE may struggle as valuations may come off by at least 50 pc if the merger does not go through, which in turn could hamper shareholder and promoter stake valuation in ZEE today. We thus believe that at the end of the day, bargaining power is limited from the ZEE promoter side, and they may have to agree upon the same. Sony can also seek shareholder approval (consortium) and go ahead with the merger without Mr. Punit Goenka. We believe the probability of this event is the highest as shareholders own the company, with promoters having a mere 4 pc stake.

In terms of merger process, ZEE has already filed with ROC (Registrar of Companies); the merger process has reached advance stages and hence it may be tough for Sony too to back out of this merger. We thus believe that the likelihood of this merger going through remains high (80 pc probability) with or without Mr.Punit Goenka; however, the recent approval by SAT allowing Mr.Goenka as CEO and Sony not agreeing upon the same is a potential risk for the merger, as probability of the merger not going through moves up to 20 pc now. As per our checks with legal experts, SEBI will file a stay in Supreme Court against the SAT order by end of this month. We await updates from Sony and ZEE management, which will provide us more colour on where this merger could be headed.

Karan Taurani @ Elara Securities