Deal. Zee-Sony merger: Invesco awaits clarity before decision on backing the deal

US-based investment firm Invesco, the largest public shareholder of ZEE Entertainment, is awaiting clarity on how the promoter family raises its stake in the Zee-Sony merged entity before taking a call on backing the merger when it goes for shareholder approval.

The American investment fund will be willing to back the merger as long as the Chandra family is allowed to increase its stake in the merged company through open market purchases, BusinessLine reported earlier citing company sources.

The definitive agreement signed by Sony and Zee is not clear on the matter, sources said.

Limit equity

According to the terms of the merger disclosed so far, Zee promoters have agreed to limit the potential equity that they may own in the combined entity at 20 per cent. And, the shares purchased by the Chandra family must be in compliance with all applicable laws, including any pricing guidelines. Therefore, it remains unclear whether Zee promoters will increase their stake either through preferential allotment or through open market purchases.

“It is concerning that the current terms of the Sony-Zee announcement …..(provide) a pathway for the founding family to raise its stake from 4 per cent to 20 per cent via methods that remain wholly opaque,” Invesco had said in its letter to the shareholders in October.

“Even now, it is not clear what is meant by pricing guidelines,” said a source close to Invesco.

According to a person who attended the analyst call hosted by Zee on Wednesday, the promoter family group has the option to increase its stake from 4 to 20 per cent by buying from the open market only. However, whether this will be formally incorporated into the agreement remains unclear.

The merger of the two media behemoths that is set to create India’s largest media and entertainment entity, has been lauded by investors and shareholders alike. However, it needs the backing of Invesco for a smooth approval from shareholders. Invesco has a pending litigation against Zee in the Bombay High Court as well as in the National Company Law Tribunal. The litigation was initiated after Zee promoters announced their intent to merge with Sony Pictures.

The NCLT proceedings will likely be withdrawn if Invesco backs the merger, according to the Invesco source mentioned earlier.

HC litigation

However, Invesco will pursue the litigation in the Bombay High Court since it was initiated by Zee and has wider ramifications on minority shareholder rights.

Proxy advisory firms on the other hand believe that clarity on how the Chandra family goes about increasing its stake in the merged entity in the future is “unnecessary”. Besides, they say that using the preferential allotment route to help Zee promoters to up their stake, which will dilute the shares of remaining shareholders, is “unlikely”.

“The 20 per cent clause looks like protection built-in for Sony to ensure that the Zee promoter group does not make a play for control of the company. The current disclosures don’t seem to suggest a preferential allotment. But, if there were (to be ) a preferential allotment at a later stage, it will require shareholder approval. Whatever be the mode of the ZEE promoters increasing their equity in the combined entity, it is unlikely that Sony will allow itself to get diluted,” said Hetal Dalal, President and Chief Operating Officer of Institutional Investor Advisory Services, a proxy advisory firm.

“The minority shareholders have two options — either to vote for the merger and in turn inherit the solid corporate governance of an MNC, with Sony controlling the majority and higher stock price, or go back to the former days of Zee with the stock trading at the lows of ₹160 per share, corporate governance issues and the uncertainty that comes with it. In fact, should Invesco not back the merger, it will be the biggest loser since it is the largest minority shareholder of Zee. Moreover, it is likely that they will be the sole entity opposing the merger,” said Shriram Subramanian, MD of InGovern Research Services, a corporate governance advisory firm.

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