Zee: Does Invesco's EGM demand lose sheen with proposed Sony merger?

#Invesco, #Punit Goenka, #SEI Trust Company, #Zee, #Zee-Sony merger

Sony shareholders will hold a 52.93 percent stake in the combined entity and Zee shareholders will own a 47.07 percent stake.

The decision by Zee Entertainment Enterprises, promoted by the Essel Group, to merge with Sony Pictures Networks India comes barely a week after two of the company’s largest investors sought to overhaul the board and remove managing director and CEO Punit Goenka, and puts shareholders in a spot.

Moneycontrol was the first to report on Goenka’s hunt for a white knight to counter the two investors, which sought to remove him through an extraordinary general meeting.

Zee’s shareholders will now have to decide whether to back Invesco Developing Markets Fund and OFI Global China Fund LLC, which together hold 17.88 percent of the company’s shares, or endorse the planned merger.

Read: Zee-Sony merger: Shareholder wanted a Taarak Mehta-like show on Zee, here’s how Punit Goenka reacted

“As a fund, Invesco would be interested in financial returns and clean governance. With Sony as a majority shareholder and a likely reconstituted board, the merged entity would be the best solution Invesco could have hoped for,” said InGovern Research Services, a proxy advisory and corporate governance advisory firm.

InGovern said there was nothing wrong in two companies proposing a merger because CEOs can initiate merger discussions and then approach shareholders. Invesco did not have an alternative plan and it would be surprising if it is not supportive of this merger, it said.

“The mindset of an investor is very different from that of a strategic investor,” said Vallabh Bhansali of ENAM Securities. “It’s a hard-nosed business deal with Sony. Clearly, they are buying into Zee with a controlling stake.”

Spoilt for choice

While the Zee-Sony merger proposal will have to be approved by shareholders, Invesco’s requisition for an EGM to reconstitute the Zee board is pending with the board.

“Invesco’s proposal has no roadmap, whereas the merger proposal has a clear roadmap with continuity of leadership and business,” JN Gupta, founder of Stakeholders Empowerment Services, a proxy advisory firm, told Moneycontrol.

Also Read: What merger with Sony means for Zee Entertainment

Unless there is a change by Invesco following the merger announcement, Zee is still liable to call the EGM sought by Invesco and OFI Global China. On September 11, both investors had asked for the EGM, seeking Goenka’s ouster from the board and the appointment of six independent directors.

The Zee board must call the EGM within 21 days of the, failing which the investors themselves can call the meeting within three months.

Goenka’s fate

According to the terms of the proposed merger, Goenka will continue as MD & CEO.

“Invesco was unhappy about the governance of Zee due to group company issues. So, Punit Goenka as the proposed MD of the merged entity should not be a concern,” InGovern said. “So, probably for the first time in India, we are seeing activism where a fund triggered an action which is pushing the company into a merger.”

Many industry experts see the proposed strategic partnership with Sony as a masterstroke to fight off Invesco’s challenge to oust Goenka, who is part of the promoter Essel Group, which owns a 3.99 percent stake in Zee.

Board set to change

While shareholders will decide which proposal to accept, the reconstitution of Zee Entertainment’s board is imminent with the proposed merger giving Sony a controlling stake in the combined company.

“Majority of the board of directors of the merged entity will be nominated by Sony Group,” Zee said in a statement.

Invesco and OFI Global sought the appointment of Surendra Singh Sirohi, Naina Krishna Murthy, Rohan Dhamija, Aruna Sharma, Srinivasa Rao Addepalli and Gaurav Mehta as independent directors on Zee’s board.

They had also asked for the removal of Manish Chokhani and Ashok Kurien from the board ahead of the company’s annual general meeting and both resigned before their re-appointment was taken up at the shareholders’ meeting on September 14.

Crucial voting

Voting at the EGM will be the most crucial part of this protracted battle and vote gathering from both sides will be critical in deciding its outcome.

Ace investor Rakesh Jhunjhunwala’s RARE Enterprises and BoFA Securities picked up close to half a percent stake each during the surge in the Zee stock after Invesco’s EGM requisition. Any share purchase before the record date of the EGM will get a voting right.

The Essel Group holds only a 3.99 percent stake while Invesco and OFI Global have 17.88 percent. A lot will depend on which way the other investors swing.

Among the dominant institutional shareholders are Vanguard with 5.8 percent, Life Insurance Corporation of India with a 4.9 percent stake, and Amansa Holdings with 3.4 percent.

SBI Life Insurance Company holds 1.8 percent and HDFC Life Insurance Company has 1.66 percent.

The stake of others including Government Pension Fund Global, City of New York Group Trust and SEI Trust Company ranges between 1.5 and 2 percent each.

Domestic mutual funds Nippon Life India Trustee, Mirae Asset Emerging Bluechip Fund, ICICI Prudential Equity Arbitrage Fund, Kotak Equity Arbitrage Fund and Aditya Birla Sun Life Trustee each own over 1 percent stake in Zee.

If the Sony deal goes through, Essel Group gets the right to increase its shareholding in the merged entity.

“According to the term sheet, the promoter family is free to increase its shareholding from the current ~4 percent to up to 20 percent, in a manner that is in accordance with applicable law,” Zee said.

The next three months are crucial for deciding Zee Entertainment’s fate. Zee and Sony have entered into an exclusivity period of 90 days, while the EGM demand will have to be actioned earlier if the Zee board approves it.

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