Sony Group Corp. has officially notified Zee Entertainment Enterprises Ltd. it plans to call off the merger between its India unit and the media network, ending a two-year acquisition saga and leaving Zee vulnerable to competition as rivals bulk up.

The Japanese entertainment giant sent a termination letter to Zee early on Monday and is expected to disclose it to the exchange later, said people familiar with the plan, who asked not to be identified as the announcement is not yet public.

Sony cited conditions of the merger agreement not being met as the reason for the termination, according to the letter seen by Bloomberg. 

A Sony spokeswoman declined to comment. A representative for Zee did not immediately respond to a request for comment. 

The move follows a stalemate between the companies over whether Zee's Chief Executive Officer Punit Goenka would lead the merged entity amid an investigation into his conduct by India's capital markets regulator. The standoff now appears to have scuttled the deal, which would have created a $10 billion media giant with the financial muscle to take on global powerhouses Netflix Inc. and Amazon.com Inc.

Bloomberg News reported on Jan. 8 that Sony was planning to call off the merger as the two sides fail to resolve the leadership dispute. Zee said later that they were still in talks to complete the merger.

If Goenka is ousted from Zee, which has seen deteriorating financial health, Sony can potentially reconsider another merger proposal, according to one of the people. Zee's profit for the year ended March 31 dropped 95% to 478 million rupees ($5.8 million) compared with the previous period. 

Grace Period

The termination letter from Sony came after a 30-day grace period ended over the weekend when the two sides couldn't reach an agreement on a deadline set in late December.

The last-lap tussle over leadership was the single biggest hurdle for the deal - Zee was insisting that Goenka would lead the new entity as agreed in the 2021 pact, while Sony was wary of his appointment given the regulatory probe against him.

The Securities and Exchange Board of India alleged in June that the Mumbai-based media house faked the recovery of loans to cover private financing deals by its founder, Subhash Chandra. Chandra and his son, Goenka, "abused their position" and siphoned off funds, SEBI said in an interim order, barring Goenka from executive or director appointments in listed companies.

While Goenka got a reprieve from an appellate authority against the Sebi order, Sony viewed the ongoing probe as a corporate governance issue, Bloomberg reported earlier. 

The collapsed deal, which had received almost all regulatory approvals, would have created an entertainment behemoth in which Sony was supposed to own a 50.86% stake, with Goenka's family owning 3.99%. 

Sony, which will now have to redraw its media plans for the world's most-populous country, was expected to benefit from Zee's deep library of content in regional Indian languages and its bouquet of dozens of local television channels. 

Zee not only faces financial vulnerability and investor angst, it's also going to compete against stronger rivals as Reliance Industries Ltd. and Walt Disney Co. plow on in their talks to merge their India media operations.