Zee-Sony merger no more than camouflage to distract from primary issue: Invesco

Invesco has been in talks with Zeel’s management on governance issues for years.

Mumbai: Invesco Developing Markets Fund has written a biting open letter addressed to the shareholders of Zee Entertainment Enterprises Ltd (Zeel). The investor has raised concerns regarding the “repeated governance failures” and “underperformance” of the company and has claimed that the timing of the announcement of an alignment with Sony Pictures Networks India (SPNI) is a camouflage to distract from the primary issue before the company.

The letter is signed by Invesco’s chief investment officer Justin M Leverenz.

It states that the investor has been in talks with Zeel’s management for over two years and has shared suggestions on matters including disclosures, capital allocation, ring-fencing, and distancing Zeel from the long shadow of another family "group companies." However, the outcome of these discussions has “yielded nothing other than platitudes such as Zee 4.0.”

The investor observed that Zeel’s stock price increased by 40 per cent after it called for an extraordinary general meeting of shareholders. “The purpose of this action – unique in the almost 25-year history of our fund – is to enable all shareholders to vote on the proposed removal of the remaining non-independent director and to add six additional independent directors to the board," it said.

The increase in stock price after our intentions became public demonstrates the frustration of Zeel’s long-suffering investors and the appetite for change, claimed Invesco. Invesco pointed out that the Indian stock market indices have more than doubled in the preceding five years, whereas the stock of Zeel had more than halved in the same period.

Invesco highlighted the urgent need for independent perspectives on Zeel’s board citing the company’s governance failures and prolonged underperformance. The EGM would hold the board and management of Zeel accountable for the past performance of the company, it said.

According to the investor, the lack of governance oversight by Zeel’s current board was identified in the Securities and Exchange Board of India (SEBI) letter dated 17 June. The letter highlighted several aspects pertaining to Zeel including “large outstanding dues from related parties,” “letters of comfort issued by directors of the company without informing the board,” and based these and other observations concluded that the “actions of the company are not in the best interest of shareholders.”

Invesco also expressed its concerns over Zeel’s proposed alignment with Sony, which it noted, “favours the founding family at the expense of shareholders.”

It said, “This non-binding agreement gifts a two per cent equity stake to the promoters of Zee in the guise of a ‘non-compete,’ even though the current managing director and chief executive officer of Zee will continue to run the proposed merged entity for the next five years. This is dilutive to all other shareholders, which we consider unfair. At the very least, we would expect such largess to be contingent on the MD/CEO leaving said position (thus raising the scenario of ‘non-compete’) or be structured in the form of time vesting and performance-linked ESOPs, which we as shareholders welcome as a transparent way to reward performance and leadership.”

It added, “The Zee-Sony announcement casually mentions that the Zee promoter family will have the right to raise their stake from four per cent to 20 per cent, without specifying any manner in which this meaningful change will actually happen. Will this change the majority control of Sony in the merged entity? Will it involve open market purchases, warrants, or some other financial instrument? If the latter, will say instruments/warrants to the promoter family be priced so as to advantage them at the cost of ordinary shareholders? This lack of clarity around key aspects of the Zee-Sony announcement should concern all shareholders.”

Invesco stated that they would view the transaction in a constructive spirit “if and when” additional information regarding the proposed merger is made available.

Zeel two top investors Invesco and OFI Global China Fund LLC who combined own 18 per cent stake in the company had sent a requisition notice to Zeel on 11 September to call an EGM even after two weeks, the investors moved to NCLT, citing provisions of Company Law, according to which the company is bound to call for an EGM within a specific number of days if stakeholder demanding it owns more than 10 per cent of the company.

The investors had also sought the removal of long-standing directors and close associates of the Chandra family from the board. The two independent directors Ashok Kurien and Manish Chokhani have already submitted their resignations.

The investors moved to have six nominees appointed to the board of Zeel, which included Surendra Singh Sirohi, Naina Krishna Murthy, Rohan Dhamija, Aruna Sharma, Srinivasa Rao Addepali, and Gaurav Mehta as independent directors of the board for a term up to five consecutive years. The notice was received by Zeel on 12 September, and it informed the stock exchanges on 13 September, adding that the appointments are subject to approval by the ministry of information and broadcasting (I&B).

Zeel refused to conduct the EGM citing "shareholders interest," and moved to Bombay high court on 2 October seeking to declare the requisition notice as "illegal and invalid."

“These actions, which ostensibly are being taken in the ‘best interests of all shareholders,' as Zee’s communications claim, are in fact indicative of a management team that places self-interest over the interest of the institution it leads, its employees and all other shareholders, as well as a Board whose permissive culture has enabled this behaviour and its consequences,” said Invesco.

Invesco stated that it will exercise its right to conduct an EGM and if the proposal moved at the meeting finds favour from the shareholders so as to carry the vote, then six new independent directors will join the board of Zeel and the sitting managing director and chief executive officer of the company Punit Goenka will be removed from the board.

The newly constituted board will deliberate and determine the future leadership of the company, including the appointment of an interim CEO, while the formal search for a CEO within the management of the company or from within the Indian media industry is conducted.

“We wish to clarify the issues on which we will not compromise in connection with any transaction, and where we will continue to make our voice and our vote heard. We will firmly oppose any strategic deal structure that unfairly rewards select shareholders, such as the promoter family, at the expense of ordinary shareholders,” it concluded.

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