Zee and Sony merger to raise heat in television space

Sony corporate office in India (Photo: Sony)

Seeking to consolidate its entertainment businesses, sprawled across the world, Japanese conglomerate Sony had zeroed in on India as a market where it would either seek to be in the top three players or exit the market entirely. As part of this exercise, Sony had been aggressively scouting around for partners whom it could buy or even sell its Indian business under Sony Pictures Network India (SPNI) to. After several months, of negotiations and scouting around, Sony, has finally cracked a deal with Zee Entertainment Enterprises Limited (ZEEL) and formed the second-largest entertainment network in the country after Disney’s Star India. Currently, Star alone offers 60 different channels in the GEC, while the merged entity will include more than 75 television channels, film assets and two OTT platforms, SonyLIV and Zee5.

India currently has 900 million TV viewers and almost 800 channels offering a variety of entertainment ranging from reality shows to sports. According to a report by Ernst & Young, an accounting firm, the Indian media and entertainment sector for FY2020 stood at USD19 billion dollars.

As per the merger, the promoters of Sony will hold 51 pc, Zee 4 pc and the rest 45 pc will be held by the public. As per a report released by Motilal Oswal, a stock broking company, the merged entity is valued at approximately 17 times the FY20 EV/EBIDTA and 22 times the price-to-earnings ratio. On a sum-of-the-parts valuation (SoTP) basis the merged entity’s linear business is estimated to be valued at 11 to 12 times the EV/EBIDTA with a negative value for the OTT business.

Both the companies are going in for rights’ issues of their respective shares to bring new capital on board in the merged entity. While SPNI will issue INR 79.5 billion worth of shares on rights basis, while ZEE will raise INR 11 billion through the issue and both the companies will infuse INR 90.5 billion in the combined entity. Apart from this, with the existing cash on the books of these companies, the merged entity will have a decent INR 113.4 billion available in their war chest to take on Disney.

Make or break for Sony

Sony entered the Indian market in the late 1990s and has tried almost everything in its power to corner the number one spot. Sony has a strong infrastructure in terms of sports entertainment and gives a head-on competition to Star. However, in general entertainment, it has failed to make much headway, capturing a fraction of the Hindi audience. In the regional languages market, too, Sony failed to make a major dent has only two partially successful Sony Marathi and Sony Aath channels. However, both however failed to reach the weekly top five most-watched channels as per Broadcast Audience Research Council (BARC) India, an industry body that tracks television viewership.

Sony’s purchase of Zee makes sense as the latter has a very strong footprint in the regional channels. In the categories of Bangla and Marathi, Zee is the second most-watched channel just after Star. Apart from these regional languages, Zee has captured Malayalam, Kannada, Telugu, Tamil and Odia audiences successfully as per the weekly data available on BARC.

The combined entity will have the best of both. Sony has the resources for sports entertainment and deep pockets, while Zee offers the regional stronghold. The merged entity will form a behemoth in the GEC industry raising the bar for the competition. Diving into the OTT sector, as per a report by Emkay, another financial services company, Disney+ Hotstar, Amazon Prime Video and Netflix corner estimated 80 pc of the revenue market share. Disney+ Hotstar is leading with an estimated 46 million subscribers by the end of 2021. SonyLIV and Zee5 have a combined market share of only 13-14 pc.

The broking house goes on to say that the merged entity is likely to be seriously in the play for the much-vaunted broadcast rights for cricket tournaments, notably the money-spinner Indian Premiere League, by far the richest cricket league in the world, as well as the rights for Indian national team’s games. “We are of the view that ZEE+Sony should be using its balance sheet strength to acquire either IPL or ICC India cricket series rights (both currently with Star India) as that would play a critical role in the face-lifting its OTT platform and improving monetisation capabilities for existing and potential non-sports content,’’ says Emkay’s report.

‘‘The market is very competitive. There is always the fear of being sold or being bought out even for big companies like Sony. A few months back only Sony was in talks for a merger with Reliance’s Viacom network of Colors. It also considered merging with Zee at that time but since the Reliance merger was already in talks, Sony did not pursue Zee,’’ a Sony insider tells Media India Group.

‘‘The growth in this market is after a point becomes stagnant and but you need to keep moving forward. Sony lacks the regional reach that Zee has. In Hindi, Star with its channels has the highest weekly viewership with 31.5-32.5 pc, while Zee is second placed with about 18 pc and Sony is further behind with 13 pc. The combined entity will be able to compete for advertising revenues through their greater combined viewership.

Another gain for Sony in the merger is the very rich repertoire that Zee boasts of in music as well as films, segments where Sony has been weak and failed to make adequate investments in the past. “With the large music and films’ libraries that Zee brings along with it, we would have a plethora of options for providing the user with entertainment choices,’’ adds the Sony insider.

The competition is bound to increase with two of the top three players in the GEC market joining forces. All the players in this sector are trying to get the bigger share of the pie by hook or by crook. “With only three behemoths in the market, and two joining houses makes us the strongest player in the GEC category. Talking of sports Star has the lucrative rights for cricket. Sony and Zee, with their combined pockets, will be making a play for it. This will help us build our OTT platforms as well. With the coming of OTTs, TV channels have witnessed a decline in viewership and this decline will continue further as OTT offers flexibility which normal television can’t offer. If we get the rights for cricket then this will be a major boost for us in especially in raising the viewership and getting active subscribers for the OTT platform,” says the Sony employee.