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How the marriage of compulsion between PVR and INOX, India’s biggest multiplex companies, might just help their beleaguered theatres recover from the twin blows of the pandemic and the OTT onslaught. And alter the dynamics of the film exhibition business

By: Krishna Gopalan and Vidya S.
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A merger of two
companies is often called a meeting of minds. By any yardstick, it is a complex affair that involves a host of issues ranging from financial metrics, a cultural fit and, perhaps most importantly, keeping differences aside in the interest of creating a robust organisation.

Much of this is true in the case of PVR Ltd and INOX Leisure Ltd, two big names in the multiplex space. They competed fiercely, although some regions were always their respective strongholds—north, south and west India for PVR, and east and central for INOX. The two men at the centre of this new entity called PVR-INOX, Ajay Bijli and Siddharth Jain, are candid when they speak of how the pandemic played havoc. Business came to a standstill and the emergence of OTT (over-the-top) did not do their cause any good. Revenue took a huge beating—PVR’s revenues fell 91 per cent, and INOX’s 92 per cent in FY21—and an uncertain future with a disruptive present made for a marriage of compulsion.

Together they are stronger—PVR-INOX will have 1,546 screens across 109 cities. It is a combo with substantial ability to derive significant cost and revenue synergies in addition to driving a serious bargain across all components of the multiplex business. Not surprisingly, analysts and industry trackers are enthused and the stocks of both companies, ever since the merger was announced on March 27 (Sunday), surged to new highs. PVR closed at `1,883.50 on March 28, up 3 per cent from its previous close;  and INOX closed 11 per cent higher at `522.90.

While things are getting back to normal, the change is something we cannot deny. The question is how we can counter that going forward and protect the theatrical business. Yes, the pandemic did hasten the process of PVR and us coming together.

Ajay Bijli
CMD
PVR

But there are challenges ahead. The proposed merger will need to focus on areas related to countering OTT, identifying new revenue streams, and ensuring adequate responses to any objections of the Competition Commission of India (CCI).

Putting it together

The background of both PVR and INOX could not have been more different. Bijli set up PVR in the mid-1990s; his family owned a theatre in Delhi. Jain’s family had a large business in industrial gas before setting up their first multiplex in Pune.

Till March 2020, the story for both was on track and one would have laughed off any talk of a merger. In fact, both had grown through the M&A route. INOX had bought over Satyam, Fame and Calcutta Cine, while PVR picked up Cinemax Cinemas, DT Cinemas and SPI Cinemas. Then the pandemic came and the industry saw a reversal of fortunes. Apart from movie theatres being totally closed for long periods of time, OTT started rising phenomenally. At an affordable price tag on OTT (you can still get started for as little as Rs50 per month), a viewer could enjoy the experience of a movie in their living room. Jain points to how there was a change in habit during the pandemic. “While things are getting back to normal, the change is something we cannot deny. The question is how we can counter that going forward and protect the theatrical business. Yes, the pandemic did hasten the process of PVR and us coming together,” he says. Adds Bijli: “It was a question of two iconic brands coming together to create a stronger balance sheet.” A look at their FY21 annual reports shows cash balances of PVR and INOX at Rs 732 crore and Rs 78 crore, respectively; and their debt was at Rs 1,352 crore and Rs67 crore, respectively.

PVR-INOX will have Pavan Kumar Jain (Siddharth’s father) as non-executive chairman and Bijli as the Managing Director. Siddharth will be a non-executive, non-independent director. In terms of shareholding, the INOX promoters will hold 16.66 per cent, while the PVR founders’ share will be 10.62 per cent. The remaining shareholding will be spread across mutual funds, FIIs, etc.

The early part of this calendar year had PVR actively engaging with the Mexico-headquartered Cinepolis, which has around 400 screens in India, for a potential merger. Those familiar with the development say Cinepolis changed its mind at an advanced stage (its revenue challenges globally being one of the reasons), leaving the door open for a quickly-stitched deal with INOX. Bijli restricts himself to saying that “a lot of opportunities were getting evaluated because we felt consolidation is the name of the game”. As Jain sees it, strength in numbers was necessary: “We have to keep the habit of coming to the large screen intact and that is possible only if we improve the experience of the cinema.”

We have to keep the habit of coming to the large screen intact and that is possible only if we improve the experience of the cinema.

Siddharth Jain
Director
INOX Leisure

Utkarsh Sinha, Managing Director of boutique investment bank Bexley Advisors, says that despite a “serious shift to straight-to-OTT in India, the truth is that most studios still prefer to reserve mega releases for the big screen”. He is convinced about a resurgence in big releases if the current recovery sustains. “That will only benefit the combined entity massively in the medium term.”

And what of the CCI? Bijli says since the turnover of each is less than Rs1,000 crore, it will not fall in the purview of the regulation. For FY21, PVR’s revenue was Rs310 crore, and INOX’s was Rs148.19 crore.

We had a lease agreement with PVR for 23 screens. It is a good time to be back since we have managed to get good deals.

Rasesh Kanakia
Chairman
Kanakia Group


Big is beautiful

Given the scale of the merger, there is a lot that the two players can do as one large entity. Devang Bhatt, Lead Analyst (IT & Media) at IDBI Capital, says the combined strength will have around a 50 per cent share in multiplex screens; that number will be 16 per cent if single screens are included. The plan, as the management has said, is to add 200 screens per year at an outgo of Rs500 crore (the thumb rule in the industry is a capex of Rs2.5 crore per new screen). The current properties will retain their branding, while the new ones being rolled out will be co-branded. “Although the companies have not quantified the extent of synergies yet, we believe there will be advantages on scale, rental costs, and other operational expenses,” says Bhatt.

Interestingly, a significant difference in F&B (food and beverage) revenue per head between the two brands is likely to increase revenue. A report from IDBI Capital says it is Rs93 for PVR and Rs75.2 for INOX or a difference of 24 per cent. “That will help in getting Rs45 crore of higher revenue. Similarly, higher convenience fees and advertising revenue can lead to revenue synergy of Rs60 crore. On costs, there might be synergy of Rs100 crore related to employee costs, operational efficiencies and F&B sourcing,” says the report.

Many screens can be opened in Tier II and III cities. That will see new players and consolidation is always possible.

Tushar Dhingra
Founding CEO
Dhishoom Cinemas

For Bijli, the pandemic has questioned his own belief in being a specialist in one business. “The core business will continue to be exhibition, but a lot of tentacles and verticals can come out of it and that’s something we’ll definitely look at. We already do distribution but could look at production as well,” he says.

The multiplex landscape will now have Carnival and Cinepolis with around 400 screens each and then Miraj at around 150 screens. Sinha of Bexley Advisors points out that PVR and INOX complement each other geographically. “That means there would be little screen cannibalisation.” The scenario in the time to come, he describes, will be a duopoly, with PVR-INOX controlling close to 2,000 screens (including those in the pipeline). “That can change the pricing dynamics for content acquisition or revenue sharing. It will surely augment their buying power with producers,” says Sinha.

Understandably, news of the merger has not gone down well with film producers. What worries them is the ability to drive a hard bargain from an exhibition point of view and eventually, leaving little on the table for anyone else. Today, most large producers control the distribution chain as well, especially in the more lucrative markets. According to veteran producer Mukesh Bhatt, owner of Vishesh Films, this monopolistic situation is a huge challenge. “Of course, producers need to be concerned and we expect the noose to be tightened. There is a good chance that the combine will try to dominate and we have no option. After all, we are up against muscle power,” he says.

During the first week of a release, the money is equally divided between the producer and exhibitor. The equation starts to change from the second week—it is 42.5 per cent for the producer and 57.5 per cent for the exhibitor; in the third week, it is 37.5 per cent and 62.5 per cent, respectively. Once the film enters the fourth week (most releases do not get that far) and till it is pulled off the theatres, only 30 per cent goes to the producer, with the larger 70 per cent in the exhibitor’s pocket. “Even if the merged entity decides to increase its proportion by, say, 2 per cent in the first week, when collections are normally the highest, we are in trouble,” says a prominent producer.

According to Bijli, the PVR-INOX entity is not to be construed as a monopoly: “There are 9,500 screens in India and we are at just 1,500. Apart from us, others too will increase their count.” He emphasises that the movies and exhibition businesses are symbiotic. “If you don’t get movies, the cinemas won’t run. There is nothing to be fearful of.” Jain is clear that as more money is invested, it will increase earnings. “The number of films that have crossed the Rs100-crore revenue mark has increased simply because of the investment made by the theatrical industry.”

Serious shift to straight-to-OTT in India, the truth is that most studios still prefer to reserve mega releases for the big screen.

Utkarsh Sinha
Managing Director
Bexley Advisors

Waiting in the wings are the likes of Rasesh Kanakia, Chairman of real estate major Kanakia Group, who is now back in the multiplex industry after having sold his 138-screen Cinemax to PVR in 2012. That deal had a non-compete clause for 10 years and Kanakia is back with the MovieMax brand. “We had a lease agreement with PVR for 23 screens. It is a good time to be back since we have managed to get good deals,” he says. The brand will have nine properties across Maharashtra before moving to other states. “There are several untapped markets across smaller centres and metros. The industry will see more consolidation and there is no better time to be in it.” IDBI Capital’s Bhatt agrees: “Many screens can be opened in Tier II and III cities. That will see new players and consolidation is always possible.” Tushar Dhingra, Founding CEO, Dhishoom Cinemas, a multiplex chain in north India, believes the oligopoly between the two players is at a nascent stage. “It’s like how banking and telecom were a decade ago,” he explains. Dhingra cites the instance of a small town like Modinagar, which used to have five cinemas but has none today. “The smaller towns still remain unaddressed,” he says. “That’s why we are creating our own portfolio of cinemas.”

For a few years, especially during the pre-pandemic phase, there had been talk of the PVR promoters (the group holds 17.02 per cent) exiting the business—discussions were said to have been held with South Korea’s multiplex chain, CJ CGV. Today, both Jain and Bijli make it clear they are in it for the long haul. Bijli compares the pandemic to climbing a mountain. “Suddenly we are on top and enjoying the view and someone asks, apne aap ko kab phenk rahe ho neeche (when are you throwing yourself off the cliff),” he says with a laugh. Clearly, there appears to be no hurry to exit and Bijli signs off by saying, “Let’s enjoy the view.” For now, it is showtime at PVR-INOX.

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Story: Krishna Gopalan and Vidya S.
Producers: Arnav Das Sharma
Creative Producers: Raj Verma, Nilanjan Das
Videos: Mohsin Shaikh
UI Developers: Pankaj Negi, Harmeet Singh