Inside the INOX-PVR Merger Deal

Apple’s CODA won the Best Picture at the 94th Academy Awards. The Kashmir Files crossed ₹300cr ($39.6m) in worldwide box office collections. Netflix is planning to charge extra for users sharing passwords.

Quite an eventful few weeks in the movie business, indeed. If only we needed further confirmation of art imitating life.

Nevertheless, what has gripped the country’s attention in the movie industry lately is the much-hyped merger between India’s two biggest multiplex chains — PVR and INOX. This latest silver screen marriage is projected to bring a massive market rejig in the film distribution and exhibition business as the combined entity will command close to 46% of all cinema screens in the country post-merger.

Quick thoughts? Yes, it seems anti-competitive to begin with. But then again, perhaps it is not a bad thing to create a cinema behemoth of this size which can capitalise on the high-growth ecosystem to increase screen numbers and distributor revenues in India. Contrary to popular belief, despite the colossal expanse of the movie industry in India, the total number of cinema screens in the country (9,500) lag way behind others like the US (40,000) and China (70,000).

So, perhaps, not a completely disadvantageous prospect from the point of industry consolidation.

But just to be sure, let’s take a deeper look.

The Merger Minutes

The existing screens and properties of both companies will continue using their respective brands but the new screens will be branded PVR INOX. It will be carried out on a share-swap basis. Every INOX shareholder will receive three shares of PVR for 10 shares of INOX.

Some Post-Merger Facts

● INOX promoters will hold 16.7% and PVR promoters will hold a 10.6%stake in the merged entity.

● The board will be reconstituted with a total strength of 10 members and both promoter families having equal representation (two seats each).

● PVR’s Ajay Bijli will be named Managing Director. INOX’s Pavan Kumar Jain will be appointed the Non-Executive Chairman.

● Currently, PVR and INOX operate 871 and 675 screens respectively. Together, the merged entity will create and operate 1,546 screens across 109 cities.

● The entity plans on opening 180–200 new screens every year, with a particular focus in small towns and hinterlands.

After a torrid spell of two years when pandemic-induced lockdowns laid waste to the film exhibition business, theatres have slowly begun to open up. With that, things are looking up for the likes of PVR and INOX seeing as the merger couldn’t have come at a better time. With close to the operation of 1,500 screens, the merged entity will own more than half of the multiplex screens in India and account for approximately 40% of box office collections. Needless to say, both the companies will gain in a massive way.

Let’s look at it this way. Having half the market share in film exhibition means better bargaining rights with movie producers, better deals with mall owners and better ability to charge higher rates in in-theatre businesses like food and beverages.

As profitable and money-making as the film industry looks from the outside, there remain significant differences between the movie production and exhibition side of things. Upward production costs mean higher ticket prices. Even though actors and artists get paid upfront, it is the film exhibitionists who overwhelmingly bank on the audience’s reception to make money. Higher ticket prices usually pose a challenge to occupancy in theatres so even if a film is highly marketable and saleable judging by A-list star presence and production glitz, it is not as if exhibitors are assured returns at a hand-over-fist rate.

Another phenomenon which cements this argument is the rise of Over the Top (OTT) Platforms in the past decade. Streaming platforms offer affordable and convenient forms of entertainment (with “convenient” often meaning safe during the COVID-age). As a result, movie-going as a practice has lost some of its relevancy and this has consequently upended entire cost structures of distributors and exhibitors as audience footfalls dived to alarming levels.

Speaking of which, let’s look at the financials which are driving this merger.

Merger Maths

INOX is a net debt-free company. Under the deal, INOX will be the one to amalgamate with PVR, not the other way around. By virtue of the 10:3 swap ratio, 10 shares of INOX (worth ₹4,427 ($58)) generate three shares of PVR (worth ₹5,331 ($70)), which indicates a premium of nearly 20% (as of March 24th 2022’s closing price). Clearly, PVR has had to seriously sweeten INOX’s pie for this deal.

This is because even if PVR is the market leader in the film exhibition business, its ticket prices range on the higher side (₹239 ($3.15) compared to INOX’s ₹226 ($2.98) on an average basis). Plus, as per the three-months financials ended December 2021, INOX seems to be a more profitable cash cow with revenues generated worth ₹301cr ($39.7m) and a loss of ₹1.3cr ($171,833).

PVR, on the other hand, registered revenues of ₹602cr ($79.5m) and incurred a loss of ₹21.9cr ($2.8m). But even if INOX commands better valuations at the moment, PVR has a well-structured cash flow from operations to meet its existing debt servicing obligations and to shoulder on the expansion plans that the merged entity is intended for.

As far the ownership and control is concerned, it looks like a symbiosis. Given that PVR’s Ajay Bijli is to carry on as the MD, it seems he will have a role to play in managing the day-to-day affairs. INOX’s appointees, meanwhile, will hold positions in the board which will allow them to influence the critical decision-making process.

However, considering that mergers that are designed so organically are hard to spot and even harder to sustain, it remains to be seen what course the management takes down the line.

Although, before we get to that stage, there are certain checkpoints to cross in the form of regulatory approvals. But as of now, both entities seem uncharacteristically indifferent to these approvals.

Let’s start with the first one — the clearance from SEBI (Securities and Exchange Board of India). Both the stocks have been on an upward rally for some time now — INOX Leisure up by 25% and PVR up by 16% in the last six months. This suggests that the market perhaps not only had an inkling of the transaction but of the relative valuation as well. This is something that the SEBI needs to look into to ensure if there was any insider trading involved at all.

Next, the NCLT (National Company Law Tribunal) needs to approve the merger under its Section 230 clearance mechanism to assuage creditor concerns in the merged entity.

Finally, the Competition Commission of India (CCI) has to give its blessing, which seems tricky for a merger of this scale. In order to disperse monopolistic concerns, the CCI must ensure that there is clear blue water between the merged entity and its rivals across all points in the value chain starting from consumers, vendors, distributors etc.

Also, it’s worthwhile mentioning that prior to this announcement, PVR was looking at merging with the Indian arm of Mexican theatre chain Cinepolis as well. Meanwhile, INOX was reportedly in talks for joint ventures with Carnival and Miraj Cinemas. Seeing as these plans were abandoned, there must be a thorough accounting of factors which eventually led to the combination of these two large entities.

However, as of today, none of these regulatory approvals have been sought, which is uncanny considering that other mergers in the industry (Carnival + Big Cinemas, PVR + DT Cinemas) were carried out after thorough regulatory diligence even though the size of these deals were significantly smaller than the current merger.

One of the reasons behind this could be the merger control regulations under the Indian competition law which state that small transactions where the target has assets below ₹350cr ($46.2m) and revenue below ₹1,000cr ($132.1m) in the financial year are exempt from seeking merger approval. This exemption was available till March 29th 2022 (later extended). The PVR INOX merger announcement, interestingly, came on March 27th which means that both the parties evidently used their worst financial year performances (FY21) to qualify under the exemptions that they wouldn’t have qualified for in a normal (non-pandemic) year.

Talk about creating a silver lining in the silver screen industry!

(Originally published April 10th 2022 in the TRANSFIN E-O-D Newsletter)