Media Stocks: Why Drop Of 14% In 1 Largecap Stock Topped Nifty Media By 4%?

A long-pending mega-deal between Sony and Zee Entertainment (ZEEL) is once again the talk of the town. Rather than positive news, some reports claimed Sony might be looking to end a $10 billion merger deal with ZEEL, and the reason is reportedly the Mumbai-based conglomerate's MD Punit Goenka. This led to a huge selling in the media index which is the only bear amidst a bullish market tone.

The news led to a massive selling with ZEEL shares nosediving by nearly 14% to hit an intraday low of Rs 240.30 apiece. Not only that Zee's subsidiary DishTv followed behind with a steep fall of 7%. These two stocks alone were capable enough topple the Nifty Media index which plunged by more than 4% with an intraday low of 2,361.45.

Nifty Media is the only index that is taking the massive beating of bears, while other sectoral indices have surged marginally to over 2.5%.

The sharp selling comes after the Economic Times reported that Sony Group Corp is close to calling off its proposed $10 billion merger between its India operations with Zee Entertainment.

As per the report, the suitors involved in the merger could not agree with ZEEL MD Punit Goenka being the chief executive officer (CEO) of the merged entity unless Goenka is cleared of charges where he is alleged to have siphoned off money from the listed company. Not just that, Goenka is also accused of siphoning off money in other companies under the Essel Group.

In October last year, ZEEL received a lifeline from the Securities Appellate Tribunal (SAT) which set aside Sebi's order banning Subhash Chandra and Punit Goenka from holding any key managerial positions in ZEE and companies of Essel Group. This allowed Goenka to continue his role as MD & CEO of Zee. However, SAT has also directed Goenka to cooperate in the investigation carried out by SEBI.

Sebi's action came after credit facilities up to Rs 200 crore were availed by a company belonging to Essel Group (Essel Green Mobility Ltd.) from Yes Bank.

Sebi had found out that a major portion of the Rs 200 crore inflow into ZEEL had originated from either ZEEL itself or listed companies of the Essel Group or their subsidiaries (named below), which after passing through several layers, reached the accounts of the Associate Entities from where it ultimately reached ZEEL's account. Thus, the funds had followed a circular route where funds originated from ZEEL/listed companies of Essel Group and their subsidiaries, passed through various entities including those owned or controlled by the Promoter Family and ultimately reached ZEEL.

However, amidst the buzz, ZEEL has clarified stock exchanges, denying the scrapping of the deal.

In its exchange filing, ZEEL said, "We would like to clarify that the above-mentioned article is baseless and factually incorrect." It added, ". We wish to reiterate that the Company is committed to the merger with Sony and is continuing to work towards a successful closure of the proposed merger."

Following the clarification, ZEEL and DishTv shares did recover some losses but continue to be the biggest losers of the January 9th trading session and still dragging Nifty Media in red.

After the clarification, ZEEL shares dipped by 8%, while DishTV slipped 3.3%. Other stocks that stumbled are Hathaway Cable, TV18 Broadcast, Network18. and Saregama India. While stocks in green are SunTV, DB Corp, Nazara Tech, and PVR Inox.

The deal was first signed in December 2021. Sony and ZEE came into agreements to merge ZEEL with and into SPNI and combine their linear networks, digital assets, production operations and program libraries.

Under the deal, SPNI will have a cash balance of $1.5 Billion at closing, including through infusion by the current shareholders of SPNI and the promoters (founders) of ZEEL, to enable the combined company to drive sharper content creation across platforms, strengthen its footprint in the rapidly evolving digital ecosystem, bid for media rights in the fast-growing sports landscape and pursue other growth opportunities.

Also, as part of the agreement's transaction, SPE, through a subsidiary, will pay a non-compete fee to certain promoters (founders) of ZEEL, which will be used by such promoters (founders) to infuse primary equity capital into SPNI, entitling the promoters (founders) of ZEEL to acquire shares of SPNI, which would eventually equal approximately 2.11% of the shares of the combined company on a post-closing basis.

Post the deal, SPE will indirectly hold a majority of 50.86% of the combined company, the promoters (founders) of ZEEL will hold 3.99%, and the other ZEEL shareholders will hold a 45.15% stake.