NEW DELHI: Zee Entertainment has been locked in an ugly, legal tussle with its single-largest foreign investor Invesco, after the latter called for ouster of the TV network's CEO Punit Goenka, citing concerns around corporate governance and financial performance of the entity.
Goenka is the son of billionaire Subhash Chandra who built Zee’s television empire from scratch. Invesco wants to recast Zee's board but the latter has challenged the restructuring attempt in courts and alleged that the US investor is trying to take over the broadcaster. Zee has also initiated merger talks with Sony Pictures Networks India but Invesco has raised concerns over the proposed $1.6 billion takeover in a case of foreign shareholder activism.
And two days prior on Monday, Invesco — the largest shareholder with an 18 per cent stake — in a letter to shareholders said the terms of the Sony-Zee merger unveiled last month appeared to favour the group’s founding family, which owns just 4 per cent of the equity, at the expense of other investors.
In order to understand this context, let's go back to the beginning:
Subhash Chandra had founded and owned most of Zee Entertainment through the Essel Group in 1992. Zee TV is India’s second-biggest media company, and operates 79 channels with a 1.3 billion viewership. But things went south in 2018 when Chandra made big infrastructure bets. Even though Zee was minting money, its parent company Essel was betting big on the infra picture, borrowing large sums to fund troubled extravagant projects. But the big loans were taken by offering Zee's shares as collateral. Chandra at the time controlled 41% stake in Zee Entertainment Enterprise, but he put half his shares on the block to fund this infra dream.
After the sudden 2018 collapse of IL&FS Group, a large infrastructure financier, the credit markets froze for Chandra and he was left with mounting unpaid loans amounting to Rs 13,000 crore. When Essel Group defaulted, a few lenders began selling Zee’s shares. The stock price was hammered and it crashed 30%. So not only did the media stock take a beating but the value of the collateral began to drop.
Chandra had no option but to work out a deal to pay back Essel's creditors and in came rescuer Invesco-Oppenheimer, without whom Chandra couldn’t have held on. Chandra was left with no choice but to sell a sizable part of his stake in Zee Entertainment to Invesco Oppenheimer Developing Market funds — who then became the single largest shareholder in the company. In 2019, the global fund picked up an 11% stake in Zee for Rs 42.24 billion, taking its share to nearly 18%. The first lot of 7.74 per cent was picked up in 2002. Chandra's stake shrank from 41.6% to less than 5%. He had to step down from the board as chairman even though his son Punit Goenka remained the CEO.
But a year later, after the lockdown was announced, Zee's stock dropped 68% to Rs 128 as advertiser revenue dried up, while Invesco's investment value dropped 55% by September 2020. Other investors weren't too pleased and had lost faith in the promoter family post the 2019 debacle. “The company has frequently been in the news on charges of tax evasion, siphoning off funds to various promoter entities and other corporate governance issues which has not augured well with the institutional investors," reports Fortune.
On September 13, 2020, two of ZEE’s long-serving non-executive board members, Ashok Kurien and Manish Chokhani, stepped down on murmurs of them being involved in insider trading. The next day Invesco called for an EGM to oust Punit, and suggested the appointment of six independent directors. They wanted shareholders to vote on the removal of Goenka and a board overhaul because of concerns about financial performance and corporate governance. But Zee rejected Invesco’s demand to hold an EGM additionally filed a 420-page lawsuit before the Bombay high court to adjudicate if Invesco’s demands are valid.
Eleven days after Invesco called for the board overhaul, Zee announced a merger with Sony where the latter would pay $1.6 billion for a 53% stake in the new entity, Chandra's family would raise their stake to 20% and Goenka would stay on as CEO. While Invesco did say it is not against the deal, Zee rejected its request to revamp the board, following which Invesco took the battle to the companies tribunal, where it is trying to force Zee to call the meeting, saying Zee's behaviour is "oppressive". On the other hand, Chandra on primetime television accused Invesco of “trying to take over Zee in a clandestine manner" and stoked nationalistic sentiment.
"Zee is not just a business. It is a part of the lives of crores of Indians..Zee does not belong to me, it is not owned by Invesco, and they should not behave like owners either. The Zee network belongs to the 250,000 shareholders and the 90 crore people who tune in to watch it every day." He added that he will not let the American fund manager succeed in its effort to wrest control of Zee.
Following this brouhaha, Invesco shot off a letter to Zee's shareholders alleging that the terms of the Sony-Zee merger were only in favour of the group’s founding family, which owns just 4% of the equity, at the expense of other investors.
“We are disappointed that the leadership of Zee has resorted to a reckless public relations campaign in response to the overwhelming demand from shareholders for leadership changes at Zee...These actions and rhetoric are aimed at avoiding true accountability for the governance lapses and shareholder value destruction that the current leadership and Board have presided over. We are calling on Zee shareholders to join us in asking why the founding family, which holds under 4% of the company’s shares, should benefit at the expense of the investors who hold the remaining 96%."
It reiterated that any deal for Zee with Sony Pictures Networks India or other potential partners should be considered by an independent new board, given that Zee was “a highly-undervalued asset, mired in innuendo and financial volatility...We will firmly oppose any strategic deal structure that unfairly rewards select shareholders, such as the promoter family, at the expense of other shareholders."
Invesco also said it considers Sony’s non-binding proposal “no more than camouflage on the part of Zee to divert and distract from the primary issue facing the company”. And industry experts agree as the deal is a non-binding term sheet between the two entities—with a negotiation period of 90 days during which Zee and Sony will conduct mutual due diligence, which means the deal could also be called off.
Invesco's letter resulted in Punit Goenka crying foul and writing another letter to the shareholders He alleged that the real reason for Invesco's fury with the Sony deal is because Punit had rejected a a merger proposal in February on behalf of a rival company, part of a large Indian business group, which, if accepted, would have led to a loss of Rs 10,000 crore for the company's shareholders.
The merger deal was presented by Invesco’s representatives Aroon Balani and Bhavtosh Vajpayee. It turns out that this large media conglomerate was none other than Reliance Industries. As per Invesco’s proposal, the strategic partner was to have a majority stake in the merged entity and Goenka was offered to remain MD & CEO,
In a statement on Wednesday, RIL revealed that it was in talks for acquiring ZEEL but did not go ahead with the transaction after talks between Invesco and the Zee promoters broke down. It added that it respects all founders and has never resorted to any hostile transactions in the past and hence it did not proceed further.