Sony’s fraught Zee deal in India reveals Hollywood’s struggle to crack Bollywood

In 2021, Sony secured a deal that seemed to be the perfect way to ride India’s growth wave: a majority stake in Zee, the country’s largest listed media company and a stalwart of Bollywood.

Sony arrived as a white knight to aid Zee’s 73-year-old founder Subhash Chandra and his chief executive son Punit Goenka in their battle against US investor Invesco, which wanted to oust the family over a “long shadow” of alleged mismanagement that left Zee’s share price floundering.

A last-minute agreement giving Sony a 53 per cent stake in the new entity helped them fend off the Invesco challenge and allowed Goenka to stay on. Sony executives were optimistic that the deal between its Indian business and Zee would create a $10bn media powerhouse in one of the world’s most promising entertainment markets.

But more than two years later, the Japanese group is confronting the same problems that Invesco did — and is running out of patience with Zee. Despite the planned merger being approved by Indian regulators last summer, it still has not closed.

Instead, the companies have lurched from one obstacle to another amid a regulatory investigation into allegations that Chandra and Goenka engaged in a “fraudulent and unfair” scheme to divert about Rs2bn ($24mn) from Zee.

Making matters worse, Zee’s business has faltered in recent months, partly as a result of higher streaming costs. In December the company admitted it could not meet a deadline to close the deal, prompting Sony officials to say they were willing to walk away.

Sony now says it wants Goenka out before the deal can go through ahead of a January 20 deadline, a demand the Indian executive is fiercely resisting, according to three people familiar with the matter.

“If [Goenka] hadn’t brought this deal to the table there is no deal,” said Paritosh Joshi, a former media executive who is close to the tycoon. Joshi said Goenka would not “go down without a real and very tough fight”.

Failure risks turning Sony into the most recent global media group to struggle to scale up in India, a market executives feel is too promising to ignore but which has proved consistently hard to crack. Hollywood studios have long looked to the country’s enormous, cinema-loving population for growth, only to face fierce competition from local media barons and low user revenues that leave them struggling to make money.

Walt Disney is also re-evaluating its presence in the Indian market. Disney acquired the Indian broadcaster Star with its 2019 purchase of 21st Century Fox. Star was considered to be one of the gems of the Fox portfolio, but more recently it has drawn attention on Wall Street for the high cost of the rights to broadcast Indian cricket. Its streaming business also generates far less revenue per subscriber than in other parts of the world.

Looking to offset such costs, Disney has entered a non-binding agreement with Mukesh Ambani’s Reliance Industries about selling a 51 per cent stake in the business, according to two sources familiar with the talks. If that deal happens, it will be the latest instance of international media groups scaling back or exiting India, a group that includes Warner Bros.

But even as others pulled back, Sony — which has been operating in the country for decades — remained bullish on India. Sony “knew what was happening [at Zee] and they’ve been selling India very aggressively to their investors,” said Vivekanand Subbaraman, a media analyst at brokerage Ambit Capital in Mumbai. “Sony seems to be stuck between a rock and a hard place” with the ongoing regulatory investigation.

Sony seems to be stuck between a rock and a hard place

Zee’s share price is down more than 50 per cent from a 2018 high, but it has rallied by 45 per cent since June 2023 as confidence in the merger’s success grew among investors. Analysts said the stock could reverse if things fall apart.

Zee shares rose on Thursday after local media reported Goenka would consider stepping down. Zee declined to comment on the reports.

People familiar with Sony’s thinking said the group still wanted Zee and the breadth of access to India that it brought, even if it meant potentially renegotiating the entire deal, including management and an agreed $1.6bn capital injection.

“If the deal falls through then all options are on the table,” said one of the people. Another person did not rule out a further extension to the negotiations and said Zee was the only media asset Sony had targeted in India.

The talks between Disney and Reliance are another factor weighing on Sony’s decision. A Disney-Reliance merger in India “would create a strong market leader with over 40 per cent TV viewership share and a dominant streaming presence”, according to UBS analysts. The combined Zee-Sony would have close to a 25 to 30 per cent viewership share and “be in a much better position to compete”.

Launched in 1992, Zee was the first of a generation of private broadcasters in India, helping open a staid, state-controlled TV market with soap operas and chat shows.

Chandra, a powerful tycoon with connections to Narendra Modi’s Hindu nationalist Bharatiya Janata party, was forced to sell most of the family’s holdings to pay off bad debts from other businesses, with their holdings falling from 35 per cent in 2019 to 4 per cent.

Zee’s business has struggled in the two years since the deal was agreed, with viewership and advertising revenue slowing as the company spent heavily on content to build out its streaming business. Earnings before interest, tax, depreciation and amortisation fell 36 per cent in the year ended March 2023.

The difficulties for Zee’s founders came to a head last year when the Securities and Exchange Board of India, the markets regulator, barred Goenka from running the company, alleging that he and his father had diverted money from Zee to family-controlled entities.

An appeals court overturned the ban, calling it “erroneous” and allowing Goenka to return to Zee, but a Sebi investigation into the allegations continues, prompting Sony’s push for him to step aside from the new entity. Zee has denied the allegations.

“It has taken two long years,” one person familiar with Zee’s thinking said. “It’s evident that Sony has had a change of mind at the eleventh hour.”

The person argued that removing Goenka at this stage would require restarting the lengthy shareholder and regulatory approval process — an argument disputed by some deal lawyers — and was “not in the best interest of the shareholders”.

Two directors were voted off the board last month, and a third director resigned before the vote over concerns including about accounting and Goenka’s high pay of Rs350mn in the year ended March 2023.

“If you’re really interested in the longevity of the business and you have such a large shareholder coming in, give up and let that guy run the company and see your 4 per cent expand,” one investor in Zee said.