Sony Group Corp. officially informed Zee Entertainment Enterprises Ltd. about its decision to cancel the merger between their Indian units, concluding a prolonged two-year acquisition process and exposing Zee to increased competition as its competitors strengthen their positions.

Sony, a prominent Japanese entertainment company, issued a termination letter to Zee on Monday, with plans to make the announcement public later. The termination is attributed to unmet conditions outlined in the merger agreement, as revealed in the Bloomberg-reported letter from Sony.

Sony's spokesperson declined to provide additional comments, and Zee's representative has yet to respond to inquiries. The decision follows a deadlock between the two companies, primarily centered around the leadership role in the merged entity. The dispute revolves around Zee's CEO, Punit Goenka, and an investigation into his conduct by India's capital markets regulator. This impasse ultimately led to the collapse of a potentially $10 billion merger, capable of establishing a media giant capable of rivaling global players like Netflix and Amazon.

If Goenka is removed from Zee, Sony may consider revisiting the merger proposal. Zee's financial health has deteriorated, with a 95% drop in profit for the year ending March 31. The termination letter came after a 30-day grace period expired over the weekend, during which the two sides failed to reach an agreement on a deadline set in late December.

The primary obstacle to the deal was the leadership dispute, with Zee insisting on Goenka leading the new entity, while Sony expressed reservations due to the regulatory probe against him. The Securities and Exchange Board of India (SEBI) accused Zee of faking loan recovery and financial misconduct, leading to restrictions on Goenka's executive appointments. Despite a reprieve from an appellate authority against the SEBI order, Sony perceived the ongoing probe as a corporate governance concern.

The failed deal, despite receiving almost all regulatory approvals, would have given Sony a 50.86% stake, with Goenka's family holding 3.99%. Sony must now revise its media strategy for India, a market it expected to dominate by leveraging Zee's extensive content library in regional languages and its array of local television channels. Meanwhile, Zee faces financial vulnerabilities, investor concerns, and intensified competition from robust rivals like Reliance Industries Ltd. and Walt Disney Co., actively pursuing their merger talks for India's media operations.