While welcoming any potential strategic alignment, the fund – Invesco Developing Markets Equities (IDME) — considered an ally of the Subhash Chandra family since 2002, have expressed concerns over some transaction terms that “enrich the Zee’s founding family at the expense of ordinary shareholders.” It also suggests a way ahead for the company following the EGM vote called to oust Goenka and replace him with six new independent directors, which includes a possible interim CEO.
“We are writing to reiterate the urgent need for independent perspectives on Zee’s Board given the Company’s governance failures and prolonged underperformance; reaffirm our resolve to pursue an extraordinary general meeting of shareholders (EGM) to hold the Board and management accountable; and express our concerns over some of the terms of Sony’s proposed alignment with Zee, which unfairly favor the founding family at the expense of other shareholders,” said the latter written by Justin M. Leverenz, the Chief Investment Officer
Invesco Developing Markets Equities, one of the largest emerging markets fund in the world.
ET has reviewed the contents of the letter.
“We have been a significant shareholder in Zee Entertainment Enterprises for over a decade. The depth of talent within Zee gives us conviction that if the company were properly managed, it has the potential for tremendous growth and success,” said Leverenz. “We are disappointed that the leadership of Zee has resorted to a reckless public relations campaign … These actions and rhetoric are aimed at avoiding true accountability for the governance lapses and shareholder value destruction that the current leadership and Board have presided over.”
As of August 31st, 2021, the Invesco Developing Markets fund held investments totalling Rs 56,200 crore ($7.7 billion approximately) representing about 15.8% of the total assets under management worldwide. It is the third largest foreign institutional investor (FII) in India with significant holdings in HDFC Bank, TCS, Kotak Mahindra Bank among others. The fund invested in Zee first in early 2000’s and then doubled down in 2019 buying a 11% stake in the company from Essel Group for Rs 4223 crore, at a premium to the then prevailing price.
Post the transaction, Punit Goenko was allowed to continue to run the company as CEO, despite the shareholding of the Zee promoter family went below 5% (3.99%). Goenka is Zee’s chairman emeritus, Subhas Chandra Goel’s son.
In its open letter, Invesco has cited a communication from SEBI to the company, dated written June 17th calling it “extraordinary regulator rebuke,” since it points to related party transactions, letters of comfort from Zee’s directors without informing the board which as per the Sebi letter concluded, “actions of the Company are not in the best interest of shareholders.”
Invesco therefore has argued, that their initiative is driven by their belief that “the promoter family of Zee, with the support of its current board of directors, continues to evade accountability to its ordinary shareholders, who own 96% of Zee’s equity. This lack of governance oversight by Zee’s current board has permitted Zee’s deep entanglement with the financial distress of its founding family…”
As long-term investors, Inveso has claimed, it has had regular engagement with Zee just like other portfolio companies. “Over the past two years, we initiated several friendly and well-meaning conversations with Zee’s management to support a revitalized situation at the Company. These discussions included suggestions around disclosures, capital allocation, ring-fencing, distancing Zee from the long shadow of other family “group companies” and indeed, also included thoughts around strategic alignments. This prolonged and regular engagement has yielded nothing other than platitudes such as “Zee 4.0,” claims the Invesco letter.
Zee therefore, has remained a highly under-valued asset, mired in innuendo and financial volatility, as per the Wall Street fund manager. In the last 1 month, since Invesco and Zee’s board and management have publicly fought, the Zee stock has appreciated 58%.
Attacking the governance framework of Zee, Invesco further writes, “Since our EGM requisition, we have witnessed the strange spectacle of Zee’s management, with the support of its current Board, going to great lengths to deny what Indian law deems a statutory right to ordinary shareholders. 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 behavior and its consequences.”
This compounds the need to install the independent directors, say Invesco. “It is our belief that a better governed Zee would have been at a very different pedestal than where it finds itself today. It would most certainly have avoided the reputational damage and the shareholder value erosion of the last few years. To that end, we are certain in our conviction that putting in place healthier governance structures at Zee is in and of itself a value accretive action.”
Invesco has reiterated its support to the recently announced non binding term sheet from Sony Enetrtainment that seeks a merger with Zee saying, “we would welcome any strategic initiative that places Zee’s future health at its center.”But at the same time, it has also sought more clarity around the specifics, especially around the non compete fee and the option vested on the Zee promoters to be able to rachet up their stake in the new merged company.
“The non-binding agreement gifts a 2% equity stake to the promoters of Zee in the guise of a “non-compete,” even though the current MD & CEO 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.” Instead, Invesco said it expects 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.” This would be a transparent way to reward performance and leadership, argues Invesco.
Similarly, the Zee-Sony announcement “casually” mentions that the Zee promoter family will have the right to raise their stake from five folds to 20%, without specifying any manner in which this meaningful change will actually happen. However, it remains silent on the modalities. “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 said instruments/warrants to the promoter family be priced so as to advantage them at the cost of ordinary shareholders?,” it asks.
THE ROAD AHEAD
If their proposal finds favour with other shareholders, Invesco says, six new independent Directors will join the board of Zee and Mr. Punit Goenka will be removed from the Board. “It will be the duty of this newly constituted board to deliberate on and make determinations on the future leadership of the company. Should the Board so decide, it could appoint an interim CEO from among the exceptional talent available within Zee itself. In parallel, it might approve a formal search for a CEO from within the vibrant Indian media industry, where business leaders within Zee might also place their candidature.”
An independent board said Invesco would be “best placed” to perform this function. They will then also be able to evaluate other options through an independent auction process to maximise value for the company and its shareholders. “The newly constituted board of Zee supported with the strength of independence would also be best suited to evaluate and oversee potential strategic transactions. The new board could appoint an investment bank to evaluate all proposals for strategic alignments that might be probable, including the Sony proposal in its current or any revised format, as Sony might choose to present.”
It goes on to add: “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. In all potential alignments, we expect appropriate disclosures regarding the future leadership and governance of the company.
While stating a “well-governed Zee” will be fully ready to realize its potential, either with Sony, another strategic partner, or as a standalone company, Invesco also expressed “deep disappointment with the functioning of the current Board of Zee. Timely and appropriate action on the part of the independent directors, who serve as fiduciaries to shareholders, would have precluded the situation Zee finds itself in today. To the contrary, events of the last few days have further reinforced our suspicion that the current management and Board of Zee appear unwilling to hear the voice of ordinary shareholders.”