Is Reliance Behind The Zee-Invesco Fiasco?

As Zee Entertainment Enterprises Limited’s (ZEEL) majority investors and its management continue battling for the control of Zee, a letter by CEO and MD Punit Goenka said that Invesco has a conflict of interest.

At the heart of the claim is an attempt by Invesco to initiate merger talks between Zee and Reliance Industries Limited during February 2021.

In a letter sent to the stock exchanges, Chief Executive Officer of Zee Entertainment Punit Goenka has argued that Invesco’s insistence on conducting an Extraordinary General Meeting is due to its stake in the Reliance Group.

Invesco’s funds have invested around two per cent of their total funds into Reliance Industries Limited.

In recent years, Reliance has been on an acquiring spree, as it tries to grow its Digital and Retail businesses. In the content space, it has already bought one-fourth of Balaji Tele Films, a five per cent stake in Eros International, it runs JioSaavn and owns JioStudios that focuses on content production.

Further, the company is involved in aggregating content from different production houses as it tries to grow its content base, and cement its position in the digital ecosystem.

Jio had already raised $ 15 billion a through stake sale in 2020, in a bid to lower debt and make new acquisitions.

Reliance has already confirmed that it had planned to merge some of its entities with Zee. Invesco, too, has admitted to attempting to broker a deal between the two entities.

However, Goenka highlighted that Reliance did not make a direct approach, but rather approached Zee through Invesco. According to Goenka, Invesco was pushing quite strongly for the merger between Reliance entities and ZEEL, even though the deal undervalued Zee’s shares while overvaluing Reliance’s merging entities.

“I was uncomfortable with the manner in which the deal was being pushed through by Invesco, being public shareholders of the company, without adequate information,” said Goenka in his letter.

The deal valued Zee at Rs 220 per share with the total public shareholding valued at Rs 21,129 crore while Reliance’s companies were valued at Rs 17,500 crore. The Reliance Group would invest an extra Rs 14,000 crore in the merged entity, acquiring a 60 per cent holding.

The Goenkas would retain a 4 per cent stake, and would receive employee stock options for another four per cent in the company. Punit Goenka would continue to be the Managing Director of the merged entity.

Goenka said that the Reliance entities were being valued Rs 10,000 crore higher than justified. A combination of these factors led to Goenka’s decline of the offer, and hence the offer never reached the Board or the public shareholders.

Nevertheless, Invesco intimated to Goenka that the deal would still take place. The news of the Reliance merger offer comes at a time when Zee is looking to merge with Sony Pictures’ Indian subsidiary — a deal that Invesco has objected to.

The new developments also put the entire crisis in a new light. Invesco had not disclosed the Reliance angle in any of its previous communications with shareholders, a fact that the promoter group hopes to use against Invesco.

Zee and Invesco are now caught in a legal battle as Zee has been attempting to hold off the Extraordinary General Meeting (EGM) that Invesco has called for.

So far, Invesco has majorly focused on highlighting the corporate governance lapses at Zee, and has accused Zee’s management of no accountability.

Two directors stepped down from the board after the crisis struck, but the MD Punit Goenka has continued to fight against Invesco. In addition, the investor has opposed the Sony-Zee merger as it believes that the additional two per cent gifted to the current promoters is not based on any performance criteria.

In addition, the promoter family could slowly raise its stake up to 20 per cent over time. Invesco initially came in as an investor to buy the promoter stake, but now the relationship between the investor and the promoters has broken down.

The tussle has created more questions than answers, as both the sides accuse each other of supplying incomplete information to mislead public investors.

While some experts say that Zee’s allegations sound far-fetched, it does create questions about Invesco’s plans after it gains control of the board.

In contrast, Zee is completely opposed to holding an EGM and allowing public shareholders to vote on the issue, which could clear up the issue in a fair manner.

Zee’s stock has outperformed the markets after a period of underperformance as the investors expect the shakedown to improve corporate governance in the company.