The PVR and Inox Merger, Study Guides, Projects, Research of Business Finance

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O.P JINDAL GLOBAL UNIVERSITY

CORPORATE FINANCE RESEARCH PAPER

PVR INOX MERGER

“Why would two competitors, each of whom is a giant in its own right,

merge?”

CONTENTS

• INTRODUCTION....................................................................................................................
• PARTIES
  • INOX
  • PVR........................................................................................................................................
• PRE-COVID
  • INOX
  • PVR........................................................................................................................................
• COVID IMPACT
  • INOX
  • PVR........................................................................................................................................
• WHY DID THE TWO COMPETITORS MERGED?
• FUTURE PRECIDTIONS/IMPACTS
• CONCLUSION
• BIBLOGRAPHY....................................................................................................................

shares of ₹10 each as well as a GFL Limited offer to sell 45 lakh equity shares of ₹10 apiece. Currently, it is listed on the BSE and NSE. INOX has continued to grow over the last two decades by using a variety of initiatives and acquiring and merging with various companies. Following are its major endeavor’s:

1. 2007 - Calcutta Cine Private Limited (merger)
2. 2008 - Prime Skyline Developers Private Limited (merger).
3. 2014 - 2015 - Satyam Cineplexes Limited (acquisition). All its equity shares (100%) were purchased by INOX, making SCL its wholly owned subsidiary.
4. 2015 - Shouri Properties Private Limited (acquisition). INOX at first acquired 99.29% of the equity shares in SPPL. On January 20, 2022, it bought the remaining 0.71%, making SPPL its wholly owned subsidiary.
5. 2016 - Satyam Cineplexes Limited (merger).
6. 2018 - Swanston Multiplex Cinemas Private Limited (merger).

PVR

PVR Cinemas originally came up as Priya Cinema in Vasant Vihar, Delhi. In 1995, PVR Cinemas was established as a joint venture between Priya Exhibitors Private Limited and Village Roadshow Limited, with Ajay Bijli as the chairman and managing director with the company’s commercial operations starting in June 1997^2. The introduction of the first PVR Gold Screen in Bengaluru was a significant milestone for the company. In 2003, when Village Roadshow decided to pull out of the partnership, ICICI Ventures invested ₹40 crores in PVR. In 2012, a subsidiary of PVR acquired the CineMAX theatre chain, which was owned by the Kanika group, making PVR the biggest theatre chain in India. PVR further continued its acquisitions with DT Cinemas and SPI Cinemas in 2016 and 2018 respectively. In August 2019, PVR Cinemas crossed the milestone of 800 screens in India further marking their claim on the industry. (^2) PVR, ‘PVR Cinemas: About Us’ ( PVR Ltd. , 2011) https://www.pvrcinemas.com/about accessed April 16, 2023.

PRE-COVID

INOX

Prior to the Covid-19 epidemic, INOX Leisure Ltd. had a successful run in the Indian film industry. In addition to making acquisitions and forming strategic alliances, the corporation had been growing its presence by opening additional multiplexes in Tier II and Tier III cities. The company had previously declared in 2019 that it would be acquiring Carnival Cinemas’ movie theatre division, which would have further increased its market penetration. From a financial standpoint, INOX maintained consistent revenue growth in the years preceding the pandemic. The company recorded consolidated sales of ₹1,569 crores for the financial year 2019–2020, an increase of 18% from the year before. In the same quarter, the company also posted a net profit of ₹ 144 crores. The company had a solid liquidity position of more than ₹120 crore, including cash and bank balances, undrawn credit lines, and other liquid investments, according to the CRISIL Ratings Report, dated 23rd March 2020. As of March 18 , 2020, the corporation additionally held 118 crore rupees worth of treasury shares. The business also had a healthy financial standing as of FY 2020, with an unwavering working capital cycle and little debt on its records. Additionally, it was anticipated that the Return on Net Worth will increase from 14% in FY 2019 to 17% in FY 2020^3. With cutting-edge projection and sound systems, plush seating, and varieties of food and beverage options, INOX has also been investing in enhancing the movie-watching experience for its patrons. The business additionally introduced the INOX Insignia lounges, which provided a first-class movie-viewing experience with opulent facilities. INOX Leisure Ltd. had been operating successfully overall prior to the Covid-19 outbreak, with a significant presence in the Indian film industry and consistent revenue growth. (^3) Maheshwari A, ‘Inox Leisure Limited’ [2020] WFS 2 http://www.dsij.in/productattachment/BrokerRecommendation/Buy_InoxLeisure_Limited_Wallfort_08.04. .pdf accessed April 15 2023.

As a result of restrictions put in place following the second wave of COVID-19, the multiplex chain operator announced an increase in its consolidated net loss for the second quarter ended September 2021–22, coming in at ₹87.66 crore. INOX reported a net loss of ₹67.83 crore from July through September 2022 in a BSE filing. Operational revenue increased dramatically, from ₹36 lakh in 2022 to ₹47.44 crore in 2023. The total cost during the reviewed period was ₹170.22 crore as opposed to ₹95.29 crore^6. The company has been making efforts to lessen the pandemic’s effects on its operations. The business has put in place cost-cutting strategies like lowering staff pay, renegotiating leases, and postponing capital expenditures. Additionally, the business has been concentrating on expanding its network in both Tier II and Tier III cities in the country, where the impact of the epidemic has been somewhat less severe.

PVR

Even though PVR had an exciting FY 2019-20, things did take a turn for the worse when the lockdown was implemented and that is very noticeable in their financial statements as well. For the FY 2019 - 20, PVR’s net profit was at ₹26.85 crore. It was ₹189.40 crore in 2018- 20 19. The impact of COVID-19 on PVR can be categorized into two phases. The first phase started in March 2020, when the government announced a nationwide lockdown to contain the spread of the virus. This forced all cinemas to shut down, resulting in zero revenue for PVR Cinemas. With the shutting down of Cinema halls, PVR was also not generating any revenue from food and beverage sales, admissions and other cash-flow operations. It also had to defer its capital expenditure plans in a bid to control costs as the company braces for a significant impact on its profitability in the current fiscal due to the ongoing COVID-19 pandemic. The company said it upholds its cash outflow commitments, including employee salary pay-outs, other overheads, as well as payments for older working capital. (^6) Outlook Web Desk, ‘Inox Leisure Reports Rs. 88 Crore Loss in Q2 Due to Second Covid-19 Wave’ Outlook (Mumbai, October 22 2021) https://www.outlookindia.com/website/story/business-news-multiplex-chain-inox- leisure-losses-rise-to-rs- 68 - crore-in-q2-as-cinemas-continued-to-remain-shut/398435 accessed April 17 2023.

The second phase began in October 2020 when the government allowed cinemas to reopen with certain constraints. Still, it wasn’t all smooth sailing for PVR as the restrictions on seating capacity, the fear of the virus among the public, and the lack of new movie releases affected the footfall in cinemas. Furthermore, with the rising cases of COVID-19 in certain regions led to the temporary closure of some cinemas, further impacting the company’s revenue. To overcome this predicament, PVR adopted various measures. The company introduced a contactless cinema experience, which included measures such as online booking, digital payments, and limited contact with staff. Also, several hygiene protocols like frequent sanitization, mandatory masks for staff and customers, and temperature checks were introduced. However, these measures still couldn’t bring back the pre-COVID level of success. In the financial year 2019-2020, PVR Cinemas reported a net profit of ₹141.64 crore. Conversely, in the first nine months of the financial year 2020-2021, they reported a net loss of ₹223.20 crore. Their revenue from operations in the same period declined by 71% to ₹352. crore. COVID-19 had an influence on the company’s expansion goals in addition to its financial impact. PVR Cinemas had intended to launch several new cinemas in the fiscal year 2020- 2021, however the pandemic prompted the firm to postpone its development plans. The firm had also negotiated an agreement with IMAX Corporation to open new IMAX theatres in India, but this was also jeopardised by the epidemic^7. In its annual report, the business stated that it has written to developers to waive rental and common area maintenance (CAM) payments during the lockdown time and is in discussions with developers to reduce rates after re-opening^8. (^7) George Mathew, ‘Explained: Significance of PVR-Inox Merger, and Its Impact on Entertainment Industry’ The Indian Express (Mumbai, March 30, 2022) https://indianexpress.com/article/explained/explained-pvr-inox- merger-impact-entertainment-industry-7838927/ accessed April 16 2023. (^8) PTI, ‘PVR defers capex plans to control costs amid covid-19 disruptions’ mint (New Delhi, April 14, 2023) https://www.livemint.com/companies/news/sci-sale-govt-may-invite-bids-from-four-companies- 11681495039677.html accessed April 17 2023.

and west and has 846 screens in 176 cinema halls in 71 cities, while INOX concentrates on the eastern and central regions with 692 screens in 163 theatres^11. The enterprises decided on merging in order to concentrate on cost reduction, provide tangible cost and revenue synergies for the mutual advantage of the parties, lower standard expenses of bulk negotiations, pool company resources, and utilize resources of economies of scale to their fullest potential. The united company would also be able to deliver better administration by merging the unique management strengths of the two enterprises as a result of the merger^12. FUTURE PRECIDTIONS/IMPACTS Given the extent of the amalgamation, the two parties can achieve a lot as one sizable company. According to the Lead Analyst (IT & Media), Devang Bhatt, at IDBI Capital, the combined strength of PVR and INOX would operate roughly 1,550 screens throughout 112 cities and will have a 44%-50% share in multiplex screens; if single screens are included, the estimated market share percentage drops to 16%-17% in terms of total screens. According to the management’s strategy, 200 screens will be added annually at a cost of ₹500 crores (the industry standard is a capital expenditure of ₹2.5 crore per additional screen)^13. Through expansion to a majority of Tier II and Tier III cities, the combined company would grow to be the biggest film exhibition business in India. According to PVR’s managing director, Ajay Bijli, the combined company of PVR and INOX Leisure will spend between ₹800-850 crores to upgrade and add new movie screens. Up to seven hundred crores will be used for expanding existing screens, while the remaining would go into upgrading existing screens^14. (^11) Aniruddha Jain, ‘Inox Merger with PVR: Largest Film Exhibition Company’ M&A Critique (New Delhi, 2023) https://mnacritique.mergersindia.com/inox-leisure-pvr-merger/ accessed April 17 2023. (^12) Kataria (n 1) 1 9. (^13) Gopalan and S. (n 9). (^14) Javed Farooqui, ‘PVR-Inox Draws up RS 850-Crore Expansion Plan’ The Economic Times (Mumbai, March 2

2023. https://economictimes.indiatimes.com/industry/media/entertainment/pvr-inox-draws-up-rs- 850 - crore- expansion-plan/articleshow/98344164.cms?from=mdr accessed April 18, 2023.

By guaranteeing value creation for all concerned participants, like clients, property developers, content creators, technological service suppliers, the state exchequer, and staff, the merger will aid both businesses to expand in the Indian cinema exhibition market. The newly formed company will be known as PVR INOX Limited, and the names of the currently in use screens will remain PVR and INOX, respectively. Following the merger, all new movie theatres will bear the PVR INOX name. As a result, the old businesses’ identities will be preserved, and moving forward, the new moniker will combine the two brands. Although the companies haven’t yet quantified the degree of their synergies, they anticipate benefits in terms of magnitude, rental expenses, and other operational expenditures. It’s interesting to note that a large disparity in food and beverage revenue per person between these two companies is likely to boost sales. According to a study from IDBI Capital, the difference is 24% or ₹93 for PVR and ₹75.2 for INOX. This will contribute to an increase in revenue of ₹ 4 5 crores. Similar to how greater convenience fees and revenue from ads might generate ₹60 crore in additional revenue. In terms of costs, labor costs, operational savings, and F&B procurement could all result in synergies of ₹100 crore^15. Investors will get three shares of PVR for every ten shares of INOX they now own, according to the share swap ratio of the Scheme. Analysts claim that because INOX has no net debt and PVR has net debt of ₹ 877 crores, the ratio of debt to equity is marginally in favor of INOX investors by nearly 12%^16. Because of the Merger, the combined firm would profit from increased scale, technological advancements, growth potential, increased cross-selling opportunities to a bigger pool of consumers, enhanced productivity, and cost savings, among other things. These advantages will consequently assist the business in increasing income and guarantee exceptional value generation for all investors. (^15) Gopalan and S. (n 9). (^16) Jain (n 11).

BIBLOGRAPHY Outlook Web Desk, ‘Inox Leisure Reports Rs. 88 Crore Loss in Q2 Due to Second Covid- 19 Wave’ Outlook (Mumbai, October 22 2021) https://www.outlookindia.com/website/story/business-news-multiplex-chain-inox-leisure- losses-rise-to-rs- 68 - crore-in-q2-as-cinemas-continued-to-remain-shut/398435 accessed April 17 2023. Meledan JJ, ‘Inox Leisure: Transient headwind’ [ 2020 ] SK 1 https://www.sharekhan.com/MediaGalary/StockIdea/Inox-Mar13_2020.pdf accessed April 15

Maheshwari A, ‘Inox Leisure Limited’ [2020] WFS 2 http://www.dsij.in/productattachment/BrokerRecommendation/Buy_InoxLeisure_Limited_W allfort_08.04.2020.pdf accessed April 15 2023. INOX Leisure, Annual Report 2019- 20 (ILL, 2020) https://s3.ap-southeast- 1.amazonaws.com/cdn.inoxmovies.com/Downloads/911ad4ec-13fa-4a39-86c5- ac8bcd942754.pdf accessed April 13 2023. Mathew G, ‘Explained: Significance of PVR-Inox Merger, and Its Impact on Entertainment Industry’ The Indian Express (Mumbai, March 30, 2022) https://indianexpress.com/article/explained/explained-pvr-inox-merger-impact-entertainment- industry-7838927/ accessed April 16 2023.

PVR, ‘PVR Cinemas: About Us’ ( PVR Ltd. , 2011) https://www.pvrcinemas.com/about accessed April 16, 2023 PTI, ‘PVR defers capex plans to control costs amid covid-19 disruptions’ mint (New Delhi, April 14, 2023) https://www.livemint.com/companies/news/sci-sale-govt-may-invite-bids- from-four-companies-11681495039677.html accessed April 17 2023. PVR, Annual Report 2019- 20 (PVR Ltd., 2020) https://originserver-static1- uat.pvrcinemas.com/pvrcms/financial/16092020201300016_385.pdf accessed April 14, 2023 Kotak Institutional Equities, ‘PVR-INOX: The Merger of Synergies & Opportunities–Rating: Add’ The Financial Express (New Delhi, March 13 2023) https://www.financialexpress.com/market/pvr-inox-the-merger-of-synergies-amp- opportunities-rating-add/3008087/ accessed April 15 2023. Gopalan K and S. V, ‘Why Multiplex Biggies PVR and Inox Are Coming Together’ Business Today (2022) https://www.businesstoday.in/interactive/longread/why-multiplex-biggies-pvr- and-inox-are-coming-together- 111 - 27 - 04 - 2022 accessed April 18 2023. Jain A, ‘Inox Merger with PVR: Largest Film Exhibition Company’ M&A Critique (New Delhi, 2023) https://mnacritique.mergersindia.com/inox-leisure-pvr-merger/ accessed April 17 2023. Farooqui J, ‘PVR-Inox Draws up RS 850-Crore Expansion Plan’ The Economic Times (Mumbai, March 2 2023)