(ZEE) hammered out a surprise merger deal with Sony Pictures Networks (SPN) India, apparently fending off a bid by its largest investor Invesco to oust Punit Goenka as managing director of the company.

If the deal goes through it will create India’s second-largest entertainment network by revenue and spawn an entity with 75 TV channels, two video streaming services (ZEE5 and Sony LIV), two film studios (Zee Studios and Sony Pictures Films India) and a digital content studio (Studio NXT).

The deal will be the largest such transaction in the Indian media and entertainment space.

The Wednesday morning announcement saw shares of the Subhash Chandra-founded company spike as much as 40% before ending at ?337.10, up 32%, on the BSE, for a market value of about ?32,340 crore.

Under the terms of the nonbinding agreement, SPN will infuse growth capital of $1.575 billion (Rs 11,615 crore) and end up with a 52.93% stake in the merged entity, while ZEE shareholders will own the remaining 47.07%

Given that ZEE’s founders have just a 3.99% stake, the success of the deal hinges on shareholder backing. A three-fourth majority will be required to approve the merger, the ZEE management said in a conference call with analysts on Wednesday evening. The promoter stake will remain at about 4% after the merger, inclusive of a 2% stake that will be transferred from Sony in return for a non-compete clause. It will take six-eight months for the merger to conclude, they said.

The merger proposal proposes that Goenka stay as MD and CEO of the merged entity for at least five years after completion of the deal. The majority of the board will be nominated by Sony Group and NP Singh, MD and CEO of SPN, is likely to be on the board.

“I am pleased to announce that Sony Pictures Networks India (SPNI) has entered into an exclusive, non-binding term sheet with Zee Entertainment Enterprises Ltd (ZEEL) to combine both companies’ linear networks, digital assets, production operations, and programme libraries,” Ravi Ahuja, chairman of Global Television Studios and Sony Pictures Entertainment Corporate Development, wrote in an internal mail to employees that ET has seen.

“The board of directors at ZEE has conducted a strategic review of the merger proposal between SPN and ZEE,” ZEE chairman R Gopalan said in a company release. “We have unanimously provided in-principle approval to the proposal and have advised the management to initiate the due diligence process.”

The merged entity will remain a listed entity in India. The final terms will need to be arrived at over the next 90 days, after which they will sign a binding agreement and seek requisite regulatory, corporate and shareholder approvals.

“SPE (Sony Pictures Entertainment) will have a majority stake in the combined company, and we expect that NP (Singh) will hold a leadership role on its board of directors,” Ahuja said in his note. “The combination… will create a combined content platform that can compete with domestic and global platforms and accelerate that region’s transition to digital.”

As per the last available financial details, the two put together have over Rs 13,600 crore in revenue and an employee count of more than 4,200.

The promoters of the two companies will also sign certain non-compete agreements as part of the transaction.

According to the term sheet, the promoter family of ZEE is free to increase its shareholding from the current 3.99% to up to 20%.

Invesco, which owns 17.88% in ZEE, hasn’t said why it had sought the resignation of two directors as well as that of Goenka. While the two directors resigned, despite being up for reappointment at the annual general meeting (AGM) on September 14, the shares of ZEE shot up almost 40%, suggesting that the market welcomed Invesco’s move. The pendulum has swung the other way a week later, with the stock surging by a similar degree on the merger announcement. Invesco didn’t respond to queries.

Aside from Goenka being retained, experts were also surprised that the founders will be allowed to increase their stake to as much as 20%.

“This is just the beginning and definitely not a done deal,” said Pritha Jha, partner, Pioneer Legal. “There is a 90-day window for them to wrap up due diligence and negotiations, after which a whole gamut of approvals will be needed.”

The deal will need to pass the Competition Commission of India (CCI) test.

“The merged entity will be a behemoth after completion with a combined market share of 25-30%, which is significant,” Jha said. “However, getting the CCI nod should be procedural since 30% market share should not be considered a monopoly. Star & Disney India also has a similar market share. There is enough and more competition.” Star & Disney India is No. 1 while Reliance Industries-controlled Viacom18 would be ranked third if the merger deal goes through.

This is SPN’s second attempt at a deal with ZEE. ET first reported in January 2019 that SPN was one of the few shortlisted strategic investors that ZEE was in talks with to offload the promoters’ stake in order to infuse funds for growth.

“ZEE didn’t get to close a deal with a strategic investor in 2019 and the liquidity crunch forced it to settle with a financial one. And while most of the promoters’ debt was paid, the company still needed growth capital,” said an investment banker with direct knowledge of the matter. “ZEE was evaluating multiple options during the lockdown for raising funds, including debt as it is a debt-free company. However, the board and the promoters were of the view that a strategic investor will be the first preference.”

After the deal with ZEE didn’t go through due to differences on valuations, SPN tried to merge with Viacom18, according to people with knowledge of the matter. In October last year, that deal was called off and SPN’s parent company started looking for partners again, they said.

The ZEE-Sony merger deal is said to have been in the works for some time.