Synergies in content but overlap in leadership: takeaways from ZEEL-Sony proposed merger

SPNI and ZEEL together will have over Rs 13,500 crore in revenues, 75 channels and a workforce of around 4,000. The two organisations have different cultures, but subtle similarities.

Uday Shankar is no longer the chairman of Star and Disney India. Sanjay Gupta is no longer the company's country manager. Gautam Thakkar is not the CEO of Star Sports... The leadership that transformed Star into the biggest media conglomerate in India, has moved on since Disney acquired 21st Century Fox Company. Something similar happened after Vodafone and Idea merged to form Vi.

Mergers and acquisitions (M&As) tend to bring immediate excitement. Zee Entertainment Enterprises (ZEEL) saw its shares climb up 24 per cent to Rs 318 on the Bombay Stock Exchange (BSE) after it announced a potential merger with Sony Pictures Networks India (SPNI).

SPNI and ZEEL together will have over Rs 13,500 crore in revenues, 75 channels and a workforce of around 4,000. The two organisations have different cultures, but subtle similarities. "There are enough differences to make it viable," says Kunal Dasgupta, former CEO of SPNI who was replaced by NP Singh. "Both bring different skills to the table and result in economies of scale. Culture will be significant and key to amalgamation, but with sensible management, this can be easily ironed out," adds Dasgupta.

ZEEL has a big portfolio of regional channels, something SPNI lacks. But with shows like 'Taarak Mehta Ka Ooltah Chashmah' and a general entertainment channel (GEC) like Sony, SPNI has a stronghold on the urban population, unlike ZEEL. As GECs continue to dominate both viewership and revenues, the merger certainly promises more synergies and less overlap.

"When two large networks are bundled together, the kind of deals that these players will strike will be even more attractive, in terms of revenue realisation," says Paritosh Joshi, an independent media and communication consultant. "The price-cutting that is dominant in India, when it comes to ad sales, has resulted in decreased ad revenue yields. But this consolidation will make it harder to knock them from any media plan," he asserts.

After GECs, sports is the largest genre, in terms of revenue. While the acquisition cost of sports content is high, the rates that the broadcasters rake in make it an economically viable proposition. Punit Goenka, ZEEL MD and CEO, shook hands with NP Singh of SPNI in 2016, as the latter signed a cheque of Rs 2,600 crore to acquire Ten Sports Networks from the former.

In an interview with afaqs!, media mogul Subhash Chandra had said that it is not in his DNA to lobby for cricket rights. He had his share of problems with the cricket board for the rights and was one of the early investors in the rebel Indian Cricket League. Eventually, ZEEL gave up its cricket ambition and SPNI decided to build on it.

Also Read: It is not in our DNA to lobby around cricket bodies for broadcast rights: Subhash Chandra

Sports, as a genre, plays a critical role in the acquisition of paid subscribers in OTT. ZEEL, which operates ZEE5, does not have any live sports streaming on its platform. It is a gap that SPNI can fill, as SonyLIV, its video on demand (VoD) platform, has cricket, football, wrestling and streaming rights of many other sporting properties. SonyLIV also recently streamed the Summer Olympics in Tokyo.

RC Venkateish, a media expert and former chief executive officer at Dish TV, says, "The impact of the merger will be positive, in terms of television content distribution. The combination of these two big companies will provide them with the opportunity to monetise content through not just television, but more importantly OTT."

Venkateish believes when the scale suddenly doubles, a huge amount will come into play, in terms of consolidation of content and distribution channels. "It will also provide the players cost reduction opportunities," he opines.

Like GECs, the two companies will complement each other in sports, English movies and children's genre. Over the last three years, SPNI has made significant investments in developing original children's content. But it has lower ratings due to poor distribution. As it does not have a robust portfolio of regional channels, SPNI fails to create demand beyond the Hindi speaking market.

According to Edelweiss, SPNI has a nine per cent market share, as compared to ZEEL's 18 per cent. According to the firm, "The combined entity will be the largest in India, at 27 per cent, versus Star and Disney India, at 24 per cent." The bundle of 75 channels, with a mix of kids, sports, English, male and female focused entertainment channels, will definitely help SPNI solve its distribution problems.

As the two media conglomerates sign a term sheet to iron out the deal in the next three months, Joshi asserts all the synergies that this merger will lead to, can't be anticipated ahead of time. ZEEL is a global brand, with local offerings that become complementary to SPNI’s international play. "It will tend to represent SPNI in markets where it is not well distributed," Joshi asserts.

The term sheet states that Goenka of ZEEL will continue to remain the MD and CEO of the merged listed entity for at least five years. There are reports that Singh of SPNI will be among the board of directors. "The only pain point of the merger is that there will be duplication of jobs across functions and manpower. But it is the result of any consolidation that takes place," he opines.

Dasgupta, who understands the culture of the two organisations well, talks about the decision to retain (employees), as there are duplicates in all areas. So, while there are loads of synergies between the two businesses, when it comes to people management, there is significant overlap.

"As per our initial estimates, SPNI is estimated to grow at a lower CAGR of 10 per cent (FY20-24) on PAT, which translates into Rs 1,460 crore, whereas our estimate on ZEEL is Rs 1,676 crore for FY24 (CAGR of 20 per cent). The combined entity could have a PAT of around INR 3100cr- we expect the PE multiples to be in the range of 16x-17x ; execution on the digital business will drive further re-rating, however even on these valuations - there is a possibility of a 80-100% upside at least (market cap of INR 50000cr)says Karan Taurani of Elara Capital.

So, if these predictions stays true, the overlaps and attrition are clearly worth it.