scorecardresearchWill the PVR-INOX merger be a blockbuster?
PVR Cinemas and INOX Leisure are preparing to merge in what will be a mega consolidation of the two largest movie theatre chains in India, according to reports. The combined merged company will form a large company with over  <span class='webrupee'>₹</span>16,000 crore market cap.
PVR Cinemas and INOX Leisure are preparing to merge in what will be a mega consolidation of the two largest movie theatre chains in India, according to reports. The combined merged company will form a large company with over  <span class='webrupee'>₹</span>16,000 crore market cap.

Will the PVR-INOX merger be a blockbuster?

Updated: 04 Apr 2022, 08:02 AM IST
TL;DR.

This merger will provide PVR-INOX with an invincible scale advantage, with a pan-India network of 1,500+ screens (PVR/INOX currently has 871/675 screens) and a 45-50 percent screen market share.

India's two largest multiplex firms said last week, that they would merge to create a giant cinema operator with more than 1,500 screens across 109 cities as the entertainment industry recovers from the Covid-19 pandemic.

According to the statements, the merger will unlock significant complementarity and growth potential, as well as compelling revenue and cost synergies.

PVR currently has 871 screens spread across 181 properties in 73 cities, while INOX has 675 screens spread across 160 properties in 72 cities. PVR has a stronger presence in the north, west, and south, while INOX has a larger presence in the east.

“The combined entity will become the largest film exhibition company in India operating 1,546 screens across 341 properties across 109 cities,” the filings said.

For the fiscal year ended March 31, 2021, INOX Leisure had a turnover of 148 crores, including other income of 42 crores. Its total assets are valued at Rs. 3,784 crores.

On the other hand, PVR had a turnover of 698 crore, including other income of 472 crore in FY 2020-21. Its total assets were 7,450 crore.

The merged entity will operate as PVR-INOX however, existing screens will continue under their respective brand names. Inox’s promoters will be the co-promoters of the merged entity and they will own 16.6% (16.3mn shares) in PVR-INOX while PVR’s promoters will own a 10.6% stake (10.4mn shares).

What the deal for Investors

According to analysts, the swap ratio is favourable to INOX investors by about 12%, due to its zero net debt situation compared with PVR's net debt at 857 Crore.

Based on the swap ratio of 3:10 (3 shares of PVR for 10 shares of Inox). The reconstructed board will consist of 10 members wherein both the promoter families will have equal representation with 2 seats each.

 

Screen Share
Screen Share

“This merger will also give PVR-INOX an invincible size advantage with a pan-India network of 1,500+ screens (PVR/Inox have 871/675 screens currently) with a screen market share of 45-50%. 

In comparison, Carnival and Cinepolis currently have 400 odd screens each. Also, in terms of BO share, the combined entity’s pre-COVID GBOC share was 30% (18% of PVR and 12% of Inox) reflecting clear dominance," according to the Prabhudas Lilladher report.

Why did the deal take place?

The exhibition sector took a huge hit during the pandemic. Cinemas and movie theatres have been closed to varying degrees around the world, festivals have been cancelled or postponed, and film releases have been moved to later dates or delayed indefinitely.

The global box office has dropped by billions of dollars as a result of the closure of cinemas and movie theatres.

Maharashtra, a key market for film distribution, has not even allowed theatres to operate until October 2021. 

According to the cinema body, the movie exhibition sector has lost an estimated 9,000 crores during the pandemic time. 

During that period, PVR's revenue plummeted from 3,452 crore in FY20 to 310 crore in FY21. Inox's revenues fell 92% from 1,915 crore in FY20 to 148 crore in FY21 with a loss of 257 crore.

If the deal goes as expected, additional such collaborations are likely to enter the market in the near future. This will be done to allow for a more systemized and organised exhibition industry that will focus on synergizing to reduce operating costs and boost profitability.

Will it be a box office hit?

According to analysts, PVR- INOX, as the new entity will be called, will have a combined box office share of 49%. Existing screens will continue as PVR and INOX respectively, while new screens post-merger will be branded as PVR -INOX. The market share is expected to increase as smaller chains.

 

Market share Post PVR-INox Merger deal
Market share Post PVR-INox Merger deal

According to a Ficci-EY report, of the 9,527 screens in the country, 6,327 are single-screen cinemas with multiplexes accounting for the remainder. In terms of regional mix, south and other languages contribute 35% to the Box Office, where PVR and INOX have a market share of mere 6% and 3% as regional content is largely dependent on single screens.

Operating metricsPVRINOXPost Deal
Screens8606481,508
Seats1,82,0001,47,4363,29,436
Occupancy32%28% 
Footfalls (m)8766153
ATP (INR)210200 
SPH(INR)10080 
Source: Motilal Oswal   

We believe that the merged entity has taken up a significant portion of the retail real estate pipeline, as each has over 1,000 screens planned for the next 5-10 years. This could be the most significant competitive edge. Add to that the top real-estate locations in all major Indian cities. "On the revenue front, we anticipate the biggest synergy advantage would be improved pricing power in advertising for INOX, whose advertising-income per screen was 35% lower than PVR's in FY20, but we now see it narrowing rapidly," says, Research Analyst at Nirmal Bang.

Nirmal Bang estimates a target price of 2,383 for PVR and 594 for INOX while giving a ‘buy’ rating to both the stocks. The target price represents a 30 percent and 26 percent upside for the respective stocks.

Risks from CCI

"This is the biggest risk to this deal", the Nirmal Bang report said. In a much smaller deal between PVR and DT Cinemas in 2016, some screens had to be divested for the deal to be cleared by CCI.

"We believe that PVR INOX may need to shed screens in key metros like Delhi, Mumbai etc if this rule is applied again by CCI. We also gather that deal may benefit from ‘exemption available to transactions involving small targets from notification to CCI’.

M&A Transactions in last 12 Years      
AcquirerTargetYearTarget ScreensTarget EV (RSmn)EV/Screen (Rsmn)
PVRINOX LeisureMarch 202267565,00095
PVRSPI CinemasAugust 201889*10,000112
PVRDT Cinemas2016324,300136
Carnival FilmsStargaze20153090030
Carnival Big Cinemas20142427,10029
Cinepolis IndiaFun Cinemas2014834,80058
INOXSatyam2014382,40063
Carnival Films HDIL2014101,100110
PVRCinemax20121385,70041
INOXFame2010952,41525
Source: Nirmal Bang Institutional Equities Research      

We expect INOX’s total revenue in FY22 will be below <Rs10bn (due to Covid-19), the threshold and hence CCI rules may not come into play. But, we think this is a grey area and is subject to interpretation," the report added

OTT Vs. Theatres

The battle between streaming apps and movie theatres has both benefits and drawbacks. Watching a movie in a theatre is a wonderful cinematic experience, whereas OTT platforms allow you to enjoy yourself in the comfort of your own home. They both provide excellent content and a satisfying viewing experience.

People used to be excited to see new movies on the big screen. They are still, but they are now willing to wait until they are released or purchased by OTT Platforms. Many popular streaming apps, such as Netflix and Amazon Prime, are now purchasing more digital rights to the highest-grossing films than ever before.

Youngsters are crucial to the success of Streaming Apps. The reason for this is that they seek fascinating, engaging, and relatable content, which OTT Platforms can supply. They can watch anything at any time and from any location, which is not the situation in a movie theatre.

As per the report by counter search, top 5 metro cities alone account for 55% of the total OTT users. The same report also suggested that youngsters under the age of 35 accounts for 89% of the Indian OTT users. These findings show that the majority of viewers are from the younger generation. But Streaming Apps also have content for other age groups, making them a great option.

OTT platforms witnessed a flux of new paid subscribers. In India, the OTT sector witnessed a 30% rise between March and July 2020, from $22 million to $29 million. Ormax Media released select findings, which reveal that the Indian OTT audience universe is currently at 353.2 Million (or 35.32 Crore) people.

Many producers now choose to release their low-budget films directly on OTT platforms. It is tough to release films with minimal budgets and unknown names on the big screen. In addition, due to the scarcity of movie screens in India, it can be difficult to find a release date for a film. Thus, distributing them on Streaming Apps appears to be a superior option for reducing the expense of printing and advertising while also avoiding the issue of release dates.

Both movie theatres and OTT platforms have unique selling points in the Indian streaming market. On the one hand, movie theatres provide the opportunity to enjoy 3D films with outstanding sound and picture quality. OTT Platforms, on the other hand, have no language barriers. Streaming Apps, also provide content in different languages, also provide subtitles in other languages, including regional ones.

The Future of Movie theatres

As the current trends look, the OTT Platforms are growing day by day and are here to stay. Television, cable and theatres still hold an important place in Indian homes.

There are numerous challenges for movie theatres as a result of the conflict between OTT platforms and movie theatres. To be competitive and compete with OTT Platforms, movie theatres must continuously introduce new elements to their audiences. Movie theatres should focus more on giving special effects, and content to viewers, such as IMAX, 4DX, and other formats, in order to entice them to the theatres.

OTT Platforms may pose a threat to movie theatres, but they will never be able to eliminate them from the Indian entertainment industry. For a long time, movie theatres have been up against the competition. When televisions, VCRs, and DVDs were introduced in the past, theatres faced problems, yet they still held a place in people's hearts.

OTT platforms obviously offer a variety of alternatives and benefits, but in India, it is difficult to replace movie theatres. Thus, in terms of the future of movies and entertainment in India, it appears that OTT platforms and movie theatres can coexist.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

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First Published: 04 Apr 2022, 08:01 AM IST