Mumbai: According to an official notice seen by Reuters, the country's antitrust watchdog the Competition Commission of India (CCI) found in an initial review that a merger between the Indian unit of Japan's Sony and Zee Entertainment to create a $10 billion TV company will potentially hurt competition because it will have "unparalleled bargaining power."
CCI notice to the two companies sent on 3 August stated the watchdog is of the view that a further investigation is merited. It gave the two companies 30 days from 3 August to respond.
Sony and Zee in December decided to merge their television channels, film assets, and streaming platforms to create a powerhouse in a key media and entertainment growth market of 1.4 billion people, challenging rivals like Walt Disney Co.
According to the three lawyers familiar with the process mentioned, the CCI's conclusions will delay regulatory approval of the acquisition and might require the companies to propose changes to its structure.
They also added that if that doesn't satisfy the CCI, it can result in a drawn-out approval and inquiry procedure.
Zee in a statement said it continues to take all the required legal steps to complete all the necessary approval processes for the proposed merger.
According to the CCI's 21-page notice, the proposed deal would place the combined entity in a "strong position" with around 92 channels in India, citing Sony's global revenue of $86 billion and assets of $211 billion.
"Such apparently humongous market position would enable the combined entity to enjoy an unparalleled bargaining power," the CCI said in its notice, adding the combined entity could increase the price of channel packages.
The initial review shows the deal is likely to cause an "appreciable adverse effect on competition," the watchdog said. "Thus, it is considered appropriate to conduct further inquiry into the matter."
In a media interview held in December last year, Zee's managing director Punit Goenka stated that the combined entity's relative value is "potentially close to $10 billion" and that all necessary approvals are expected by October of this year.
Classic Merger Case
According to industry executives, the deal will allow the two companies to compete with Disney's Star India network, which has dozens of popular entertainment and sports channels, by attracting more advertising revenue from streaming services and TV broadcasts.
The combined company would have a share of almost 45 per cent of the Hindi language market, which attracts the greatest viewership in the nation, according to the preliminary CCI competition assessment, with Star coming in a "distant second."
This would further concentrate such segments at the cost of the competition, the CCI said in its notice.
Sony and Zee had already responded in June and July to two so-called "defect" letters issued by the watchdog inquiring about the deal.
After reviewing submissions about advertising revenue, the CCI concluded that the combined company would probably raise the price of some advertisements in order to take advantage of its dominant market position.
"The combined strength of the parties is likely to be used to entrench their presence and earn higher profits," the CCI said.
"This merger is a classic case of the first or second largest player, integrating with the third largest competitors, to become the strong market leader."