Sony-Zee merger can hurt competition, more scrutiny needed, India watchdog finds

Highlights:

• Initial review of Sony-Zee merger shows antitrust issues -notice
• Merged entity can enjoy "humongous" market position in India
• Notice could delay deal approval - lawyers
• Companies given 30 days to respond

A merger between the Indian unit of Japan's Sony and Zee Entertainment to create a $10 billion TV enterprise will potentially hurt competition by having "unparalleled bargaining power", the country's antitrust watchdog found in an initial review, according to an official notice seen by Reuters.

The Competition Commission of India's (CCI) Aug. 3 notice to the two companies stated the watchdog is of the view that a further investigation is merited.

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. 

The CCI's findings will delay regulatory approval of the deal and could force the companies to propose changes to its structure, three Indian lawyers familiar with the process said. If that still fails to satisfy the CCI, it could lead to a prolonged approval and investigation process, they added.

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.

The CCI and Sony in India did not immediately respond to requests for comment. Representatives of Sony in Japan did not respond outside regular business hours.

In its 21-page notice, the CCI said its initial review shows the proposed deal would place the combined entity in a "strong position" with around 92 channels in India, also 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 un-paralleled bargaining power," the CCI said in its notice, adding the combined entity could increase the price of channel packages.

It gave the two companies 30 days from August 3 to respond.

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."

Zee's managing director Punit Goenka said in a media interview in December he sees the relative value of the combined entity as "potentially close to $10 billion" and expected all necessary approvals by October this year.

"CLASSIC MERGER CASE"

Industry executives say the deal would allow the two companies to attract more advertising revenue from streaming services and TV broadcasts, competing with Disney whose Star India network has dozens of popular entertainment and sports channels.

The preliminary CCI competition assessment also showed that the merged entity would have a share of around 45% of the Hindi language segment, which draws the largest audience in the country, with Star a "distant second".

This would further concentrate such segments at the cost of 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 analysing submissions related to advertising revenue, the CCI said the merged entity was likely to use its strong market position to increase the price of some advertisements.

"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."