SAT allowing Punit as CEO: A potential overhang if Sony does not agree

With regard to the appointment of Punit Goenka as the CEO of the merged Zee/Sony company, it appears that Sony is not inclined to have a CEO undergoing investigation, points out Karan Taurani, senior analyst at Elara Capital.
"Legally, we don’t foresee any challenge in appointing Mr Punit as CEO, post the relief by SAT- as indicated by primary checks with legal experts too. However, as Sony is the majority in this merger - they may decide to appoint someone else due to this investigation; there is a high likelihood of Sony appointing someone internally to head the merged company," says Taurani.
He lists out the scenarios as follows:
Scenario 1 - Merger Process Expedited with Clarity Over Punit (Probability: 80%)
In this scenario, Punit Goenka agrees to step aside as CEO, allowing the merger to proceed smoothly. This scenario is the most likely outcome, given the interests of Zee shareholders, the Goenka family, and Sony's desire for the merger to strengthen their presence in the Indian media market.
Scenario 2 - Sony Not in Favor of Appointing Punit as CEO Amidst the Ongoing Investigation (Probability: 20%)
In this scenario, Sony may choose to appoint someone else as CEO due to the ongoing SEBI investigation, potentially affecting the merger's course. While this scenario carries a lower probability, it may lead to a more complex transition and potential business synergies in the absence of Mr. Punit Goenka.
Taurani emphasizes that from a legal standpoint, appointing Punit as CEO following SAT's relief is unlikely to face significant challenges, as confirmed by their discussions with legal experts. However, as Sony holds the majority stake in the merger, they may decide to designate someone else as CEO due to the ongoing investigation. There is a high likelihood of Sony choosing an internal candidate to lead the merged company.
A change in CEO is expected to have minimal impact as the appointment of a new CEO would require shareholder and board approval. Delays in the merger process are not anticipated beyond a certain point. The merger process could conclude within the next 8-12 weeks, as Sony is unlikely to prolong the process. They do not expect significant delays in the merger due to this development.
Despite this situation, key drivers for the merged company include business synergies, superior corporate governance practices, and a stronger position in the OTT market, which could lead to enhanced valuation multiples.
Various scenarios could unfold based on Punit Goenka's stance regarding the CEO role. Elara Capial offers insights into these scenarios:
Scenario 1 – Sony May Back Out – Merger Called Off (Probability: 20%)
In case Punit Goenka wishes to be the CEO of the merged company, and Sony does not agree, there is a possibility of Sony withdrawing from the merger. They view this as an unlikely outcome, given the merger's importance for Zee shareholders and the Goenka family.
Scenario 2 – Punit Remains CEO of the Merged Co (Probability: 10%)
In this scenario, Sony may allow Punit Goenka to remain as CEO, with their own finance and operations team for day-to-day affairs. However, this seems unlikely, considering Sony's corporate culture.
Scenario 3 – Punit May Be Offered a Board Seat, but Not a CEO Role (Probability: 30%)
In this scenario, Punit may be offered a Board seat in the merged company, but not a CEO designation until the outcome of the investigation is known. This could potentially lead to superior corporate governance practices in Zee.
Scenario 4 - Merger Goes Ahead Without Punit (Probability: 40%)
In this scenario, Punit Goenka agrees to step aside as CEO if Sony decides to call off the merger. Sony may continue to run its India operations, but Zee's valuations may be affected if the merger does not proceed.
The merger process has reached advanced stages, with Zee already filing with the Registrar of Companies (ROC). Taurani believes that it may be challenging for Sony to back out of this merger. The likelihood of the merger going through remains high, with or without Punit Goenka. However, the recent approval by SAT allowing Punit as CEO and Sony's reservations is a potential risk for the merger, raising the probability of it not going through to 20%.
Elara Capital is closely monitoring the situation and awaiting updates from Sony and Zee management to provide further insights into the future of this merger.
Karan Taurani commented: "The evolving scenario around Punit Goenka's role as CEO in the Zee/Sony merger is indeed intriguing. It reflects the complex dynamics of the media and entertainment industry in India. They continue to observe and analyze these developments, and their team is prepared to provide in-depth insights as the situation unfolds."