The battle for Zee Entertainment Enterprises (ZEEL) is replete with astounding twists and turns. But most interesting is the possible Reliance Industries (RIL) hand in a hostile takeover bid. Market and media pundits had given up on Subhash Chandra, the dogged, old horse of Indian television. Few thought he could hold on to his company, but he’s managed a temporary reprieve. Last Tuesday, the Bombay High Court granted an interim injunction against two of the largest shareholders — Invesco Developing Markets Fund and OFI Global China — calling an EGM to replace the old Zee team.
The Invesco Group, with a combined 17.88% holding, has sought the removal of Punit Goenka, son of Subhash Chandra and MD of ZEEL, and the appointment of 6 new ‘independent’ directors. Counsel for ZEEL, Gopal Subramaniam, told the court Invesco was attempting to run a profitable company to the ground.
Agreeing with ZEEL, Justice Gautam Patel, in his colourful order, said: “I am inclined to agree with Mr Subramaniam on all counts. I don’t see how Goenka can be removed at all, leaving a managerial void to be possibly later filled. His removal causes an immediate vacancy and non-compliance. How this is to be done without prior permission of the MIB (Ministry of Information & Broadcasting) is also unclear.”
The legal fight will go on, but what’s behind this hostile takeover attempt? This is not a simple case of shareholder activism, as is being made out.
Diversification disaster
A little over 2 years ago, in July 2019, the company faced its first big crisis when Subhash Chandra could not meet his commitment to lenders. Many of them acquired his shares pledged against loans raised; others were paid off after several rounds of stake sales. From a holding of around 42% three years ago, Chandra’s stake in the ZEEL quickly began to erode. It is today just 3.99%.
It is at that stage in mid-2019 that the Invesco Oppenheimer Developing Markets Fund was brought in as a stabilizing factor by Subhash Chandra. In addition to its earlier holding of around 7.2%, Invesco bought an additional 11% for Rs 4,224 crore. The immediate crisis blew over, but what made these ‘loyal’ investors turn around and mount a hostile bid?
This is not a case study of Subhash Chandra and Zee as innocent victims in a takeover imbroglio. Chandra, since his early days as an oil and rice trader, and later when he pioneered private broadcasting in India, was known to punch hard and dirty above his weight. He took on Rupert Murdoch and Star TV, and with fewer resources, emerged as India’s top broadcaster in the 1990s. Chandra and his brothers diversified into film production, multiplexes, and last-mile delivery through cable TV and DTH, and built a small but robust $1.5-billion empire.
But then the greed of diversification got the better of him. He got into the high cost game of infrastructure. He floated Essel Infra to build tolled roads and airports, and even bought a cruise liner along the way. With little domain knowledge in these areas, and financed by costly debt raised by the pledging Zee shares, it expectedly led to disaster.
By mid-2019, with lenders on his doorstep, Subhash Chandra was admitting he had bitten off more than he could chew. In an open letter, he said: “My obsession of not walking away from the situation has made me bleed up to Rs 5,000 crore.” But by then it was perhaps too late. Chandra and his family’s share-holding had fallen to below 4% leaving it vulnerable to a takeover.
The RIL connection
Invesco’s bid to unseat the Chandra management from ZEEL began with an EGM notice on 11th September. By 12 October, Punit Goenka, came out with the revelation that Invesco had been arm-twisting the company board to merge with a ‘strategic group’.
“A deal was presented by Mr. Aroon Balani and Mr. Bhavtosh Vajpayee, representatives of Invesco, to Mr. Punit Goenka in February 2021, involving the merger of the company and certain entities owned by a large Indian group (strategic group)...Upon completion of the aforesaid merger, the strategic group would have held a majority stake in the merged entity,” the ZEEL note said.
The next day, 13 October, Invesco fell into the trap and revealed the ‘strategic group’ was none other than Reliance. Invesco denied it “would seek out a transaction for Zee”; but in the same breath admitted: “The role of Invesco, as Zee’s single largest shareholder, was to help facilitate that potential transaction.” When Zee rejected these overtures, ouster became the name of the game!
This writer has known Subhash Chandra for over two decades and he is not one who can be bullied. But the one group he has always had a deferential fear about is Reliance. Chandra privately made no bones about who he was talking of in 2019 when he alluded to “negative forces” making a run for his company. As far as he was concerned, the takeover battle had begun more than two years ago.
Chandra’s worries are not unfounded as Reliance has a successful track record as a ‘predator’. In the media space, RIL’s takeover of TV18 started with a bail-out of Rs 1,700 extended to cash-strapped chief promoter Raghav Bahl in 2012. The funds came through a rights issue to allow Bahl to retain his stake in his companies. By May 2014, Reliance had taken over and Raghav Bahl exited selling his shares for a little over Rs 700 crore. Sounds familiar?
Meanwhile, Zee remains an unfinished story. Will Zee’s proposed merger with Sony Pictures Network, announced after the Invesco EGM notice, save Subhash Chandra? Or, will Sony ultimately take over? Was the EGM notice triggered by the smell of a Sony-Zee deal? Do Invesco-Reliance still have the stomach to fight it out? It’s going to be an interesting story.