(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

 

MUMBAI - India’s top broadcaster is veering off script. Zee Entertainment inked an $11 billion merger with a local unit of Sony Pictures last week just days after Invesco called for a clear out of the Indian company’s board. Shares have jumped more than 70% on the developments. It’s an awkward plot but it might result in a happy ending.

Invesco, whose affiliated funds own an 18% stake in Zee, is displeased that boss Punit Goenka remains in place even though two directors have already resigned. He should be held accountable for weak oversight over the business, for concerns flagged by the company’s auditor over related party transactions, and for other governance issues, a reputable shareholder proxy group, IiAS, reckons.

Those problems, plus a pandemic-induced advertising crunch and fierce competition from streaming giants including Netflix and Amazon Prime, have crushed Zee’s stock. The price is 15% lower than two years ago when Invesco acquired most of its stake from Zee’s Chairman Emeritus Subhash Chandra, who is also Goenka’s father.

Sony Pictures Networks India is half-looking past these concerns. It’s willing to let Goenka maintain his position at the enlarged company for five years, suggesting it sees some value in the current management. The family is free to raise their stake above 4% too. But the Sony unit has engineered a deal in its favour. It is bringing an additional $1.6 billion of cash, enough to bump its equity ownership to a 53% majority in the combined business. The infusion also implies an $11 billion valuation for the merged listed company, to which Sony will be able to appoint a majority of directors.

Sony’s strong collection of sports rights and deep-pocketed parent will help Zee take on aggressive broadcast rivals like Walt Disney’s Star India. Having Goenka report to a board overseen by a new controlling shareholder might go a long way in addressing governance concerns too.

The deal values Zee at almost $5.2 billion, equivalent to 30 times forecast earnings, compared to Disney’s 35 times. But Zee’s stock is trading about one quarter below the implied value. That suggests investors doubt whether the Sony deal will close while a top shareholder is upset. If Invesco has a better plan in mind for Zee, now is the time to speak up.

 

CONTEXT NEWS

- Fund manager Invesco reiterated its call for a shareholder meeting to replace the board of India’s top broadcaster, Zee Entertainment, Bloomberg reported on Sept. 26, citing a letter sent to the company.

- Invesco-affiliated entities currently own 17.9% and wrote to the company calling for the removal of several directors, including the boss Punit Goenka, on Sept. 11. Shares of Mumbai-listed Zee have since risen more than 70% as of Sept. 27.

- On Sept. 22, Zee announced a non-binding merger with Sony Pictures Networks India. Sony India will bring $1.57 billion of cash into the enlarged listed entity, leaving Zee investors owning 47.1% of the company instead of 61.3%, Zee said in a statement.

- The two companies entered an exclusive 90-day period to finalise the terms of the deal.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Robyn Mak and Katrina Hamlin) ((For previous columns by the author, Reuters customers can click on GALANI/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | una.galani@thomsonreuters.com; Reuters Messaging: una.galani.thomsonreuters.com@reuters.net))