First priority will be to look at revenue synergies: Punit Goenka
Areas like advertising, subscription, and films will be considered for synergies, said Goenka
The merger of Zee Entertainment Enterprises Limited (ZEEL) and Sony Pictures Networks India (SPNI) will allow the two companies to unlock revenue synergies due to the massive scale and size of the merged entity (MergeCo) comprising 75 TV channels across genres besides two over the top (OTT) platforms - SonyLIV and ZEE5.
Speaking to analysts on Wednesday after announcing the merger deal, ZEEL MD and CEO Punit Goenka, who will also be the MD and CEO of MergeCo, said that the first priority as a merged entity will be to look at revenue synergies rather than cost rationalisation. The revenue synergies will be looked at in areas like advertising, subscription, films, and international.
"Globally in these kinds of mergers, the synergies are 6-10% on the revenue side, the cost is secondary in my view because you should focus on growth aspects rather than cutting costs. In order of priority, I would put advertising, subscription, films, and international. On the digital front, it will have enormous synergies on the subscription front. On the linear, we still have to play it up," Goenka noted.
MergeCo will look at cost synergies after exploiting the revenue synergies. "I will first attack the revenue synergies before attacking the cost synergies. Our first objective will be to increase and optimise the revenue for the combined entity and then look at the cost line," he added.
The MergeCo will have $1.74 billion cash on its books following the $1.57 billion fund infusion by SPNI for stake acquisition and the $170 million cash that is available with ZEEL. "Our first objective will be the growth of the company overall. Whether that will be for sports or digital will be decided by the new board of MergeCo," Goenka said.
Queried about the group's re-entry into sports broadcasting five years after selling Ten Sports to SPNI for $385 million, Goenka stated that the sports landscape has undergone a change due to the emergence of digital.
"We had sold the Ten Sports franchise to Sony five years ago and it does come back to us through the merged entity. I believe a lot has changed since the time we sold the sports business. The digital landscape has changed the ecosystem completely for monetisation of sports and therefore represents a good opportunity for the combined entity to really re-enter the space in a far more gusto manner to enable growth for the entire sector itself and we are excited about it going forward."
Sports, Goenka noted, will become an area of focus for the merged company but the decision for bidding or not bidding will be taken by the merged company. He also said that the board of MergeCo will decide on bidding for sports rights depending on the profitability. "I have always maintained that sports is about properties and the key properties that are going to be profitable going forward are the ones that we will be looking at jointly as a board," he stated.
Goenka was also asked about the closure of TV channels due to overlapping in certain genres like Hindi GEC and movies. He responded by saying that MergeCo will decide on channel rationalisation based on detailed analysis. The future plan is to maximise the reach of each of these channels.
"Channel rationalisation is a discussion for a later date because each channel has its own unique viewership also and unique programming. So one has to be careful if the rationalisation of channels has to be done and how it has to be done. At the end of the day, maximising the reach and the viewership remains the utmost criteria. Even on the Hindi movie side, Sony operates a unique library and Zee operates with its own unique library. There may be an overlap but we have distinct content properties that exist," he elaborated.
He also pointed out that there is overlap in Hindi GEC and movie genres but each channel and its viewers are different. "The overlaps are largely in the Hindi speaking markets of GEC and movies. The overlap is there but distinct content exists on two platforms. Our objective will be to maximise viewership so that we can garner revenue synergies rather than taking calls of shutting down channels or businesses."
Goenka also stated that MergeCo will maintain fiscal prudence but will not shy away from investing cash for generating value for the company and the shareholders. "There is a huge opportunity in India both on the digital side, linear side as well as the sports business that we talked about. There is an opportunity to encash on and certainly prudence of Zee will remain in our DNA going forward as well. We will maintain the Return on Cash (ROC) that we need to deliver to the shareholders. We will not just keep cash for the sake of keeping cash, we will really make it work and earn the cash for the shareholders," he averred.
The deal with Sony, Goenka said, has been arrived at after months of negotiations and preparations. "I think we have a formidable real deal on the table today. Of course, it is subject to due diligence and the necessary documentation that needs to take place. Beyond that, I don't see any risks to this transaction."
He also said that the company felt that the merger deal with Sony is in the best interests of the ZEEL shareholders. "We keep getting proposals, financials and otherwise, and we have chosen the best offer that was made to us and we proposed to the board for an in-principle approval."
ZEEL Head - M&A and Business Development Vikas Somani said that the deal will get concluded in 6-8 months once all the approvals are in place. "Any merger scheme takes 6-8 months and that's our estimate for this deal," he stated.
Somani also said that the company will follow the normal process which is followed in a merger scheme. "We have entered into exclusivity with the other party for 90 days and we will be conducting our due diligence. Post that, we will be taking the scheme to National Company Law Tribunal (NCLT) and Securities and Exchange Board of India (SEBI) and of course shareholder approval is required. Whatever timeline is required to get all these approvals will be followed," he stated.
The Competition Commission of India (CCI) approval is part of the process. "Our internal assessment is that it might not be a problem but I don't want to stick my neck out on what will happen," Somani said. Goenka added that CCI norms differ for different sectors. "In this scenario, it has to be a national-level evaluation and that's my initial assessment of the situation."
Somani also said that appointment of Punit Goenka as MD and CEO of the MergeCo is an integral part of the deal. Goenka noted that the conditions for his appointment are the same as what was approved by the shareholders of ZEEL. "There is no change in that. Any change in my remuneration would be subject to board approval or whatever approvals are required," he said.
As per the term sheet signed between the companies, SPNI will hold a 52.93% stake in the MergeCo while ZEEL shareholders will take the remaining 47.07% stake. Further, the ZEEL promoters will get an additional 2% from SPNI's 52-53% stake in lieu of a non-compete arrangement between Sony and the ZEEL promoters. The stake of ZEEL promoters can go up to 20%. There will be only one person from the current promoter family on the board of MergeCo.
"As part of the deal, there is a transfer of certain stake that will happen from Sony to the promoters so that the promoters don't enter into a conflicting business so the resulting shareholding post the transaction is going to be 4%. Just to make it clear, the company is not going to pay anything to the promoters. This is a transfer from Sony to the promoters. Non-compete will have to be voted by a majority of public shareholders," Somani clarified.
On the question, whether the recent announcement by Essel Group Chairman Dr. Subhash Chandra to venture into digital video space will not be violative of the non-compete clause with SPNI. "We will be coming out with exact wordings of what non-compete would entail in the definitive, but typically, whatever current businesses are in there...in such non-compete arrangements, they always continue. it has more to do with any future businesses which are not operational or have not been envisaged," Somani said.
Goenka pointed out that Dr. Subhash Chandra has clarified that the digital properties will not compete with Zee's digital properties. "Zee is in the business of entertainment and media, digital as a world is far greater than just entertainment. What Dr. Chandra's statement suggested was he is going to look at digital properties going forward not competing with Zee Entertainment. His intent was clear from Day 1. The digital world is a very large world and to say that we will restrict ourselves from the entire digital world will be unfair on any promoter in today's world and time," he averred.
While Sony will remain the majority shareholder with more than 50% stake, Goenka said that any dilution of stake in the MergeCo is the company's call. "It's up to Sony to do what they want to," Goenka said, on being asked whether Sony will continue to hold more than 50% of MergeCo in the event promoter shareholding jumps to 20% from 4%.
Queried if the ZEE 4.0 strategy will be followed by the MergeCo, Goenka retorted by saying that his belief in the earlier strategy has not wavered. "I will be putting that to the new board of the merged company, and now this merger also brings in the opportunity of kids and sports bouquets which we didn't have earlier. I am sure the board will have to take that call on what the capital allocation is ging to be."
On the cultural differences between the two companies, Goenka said that change is inevitable and "we too shall change to find a new culture of a combined entity". He also believes that MergeCo will continue both ZEE and Sony brands since both the brands have their own strengths.
"Both ZEE and Sony brands have their core strengths and loyalty, why would we want to risk that by going and undoing something that we already succeeded at. But does that mean we will not create a third brand? Sure, we can create a third brand also. My view would be to continue both the brands and continue to function the way we are functioning. Organisations will come together and work as one," he elaborated.
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