How The PVR-Inox Merger Could Reshape India’s Film Sector

The proposed merger between PVR Ltd. and Inox Leisure Ltd. Film is being seen as a positive move for India's film sector by leading media and entertainment executives, peer multiplex distributors, and box office analysts. All point to significant synergies on cost management, revenue upside, and bringing the benefits of scale to filmmakers, stars, as well as enhance the viewing experience for consumers.

‘There Couldn’t Be A Better Time To Consolidate’

– Raj Nayak - Founder & CEO, House of Cheer Networks; former COO, Viacom18.

The PVR-INOX merger between is a huge announcement in the media and entertainment space and good news for the film industry.

Given the turbulence that the cinema industry has gone through during the Covid-19 pandemic, with revenues of both companies hitting rock bottom, there couldn’t be a better time for them to consolidate as the merger will be below the threshold limit and may not require approval of the Competition Commission of India. Two years ago, it might have been a different scenario.

Operational Synergies

This merger will definitely put the merged entity in a dominant position with an overall screen share of over 30%-plus and almost 50% in the premium segment. The advantage of having one entity will enable PVR-Inox to leverage better market share in terms of advertising and also increase the yield which could translate into an additional revenue of 20-25% besides an organic growth of 15 to 20%. This does not take into account food and beverages where too there is bound to be a substantial upside. Even in terms of ticket pricing, there could be a huge upside, as PVR and Inox are bound to bring both the theatre portfolios on a par, which hasn’t been the case so far. The dominant position will give them more flexibility in driving the ticket prices higher. Besides this, there could be additional savings of 15-20% in general administration costs because of optimisation and removing any duplication of cost heads.

Industry Impact

India is hugely underserved in terms of cinema screens and the combined entity will give PVR-Inox enough muscle and heft to scale much faster in adding additional screens in Tier-II and Tier-III markets. From an industry point of view, this consolidation would lead to more investment coming into the sector, faster scaling of cinema screens, and the outcome of increased capacity is bound to overall benefit the cinema industry and should benefit the shareholders too.

‘Content Creators Benefit From Box Office Scale’

– Akshaye Rathi - Director, Aashirwad Theatres Pvt. Ltd.

The biggest takeaway from a PVR Ltd. and INOX Leisure Ltd. merger is that will help this new merged entity achieve a certain scale to have an impact on operational costs. Both of these companies are public limited companies and it’s easy to access their books of accounts. If you look at the kind of money that’s paid out on the operational aspects of the multiplex business, it is a very high opex business. The cost of real estate beyond a point cannot be negotiated, at least as of now. But, besides that, the manpower costs, the cost of other entities that are engaged by the multiplexes, all of those can be brought down by achieving a certain degree of scale.

A merger like this was the need of the hour. Through the pandemic, we as exhibitors have realised that minimising the opex without compromising on the quality of the user experience is something that all of us need to work towards. And that is not just temporarily now during the pandemic, but for the long run. As we emerge from the pandemic, to be able to have that operational efficiency when it comes to cost is really important. On vendors, the people from material is procured, the manpower that’s deployed, all of that will be on a larger scale and this scenario will definitely help the new PVR-INOX entity to do all that in a very efficient manner.

More Bargaining Power In Many Areas

The one thing no cinema hall can run without is a projector. There are various companies that provide those – Barco, Christie, NEC, Panasonic, etc. Every cinema chain partners with one or maximum of two entities of that sort. Similarly, for sound systems, they could be Dolby or any other entity that does that. Earlier they were the regular analog projectors with reels, then came the digital projectors, following which came the second, third, and fourth generations of those projectors. Now, the next time the next technology in the projection space steps up, think of a scenario where an entity instead of bargaining for 800 screens comes to the table bargaining for 1,500 screens. Imagine the kind of bargaining power they will have and now extend that beyond projectors and sound equipment to furniture, carpets, acoustic material, food and beverage consumables, material that is used to do up the foyers, security agencies, housekeeping agencies. This kind of scale will allow operational and cost efficiency in all of these departments, and that is a potential game-changer.

Impact On Competition

All these entities have somewhere followed similar principles while they were separate, and these two will continue to do so when they get conjoined. Having said that, even the merged entity will not contribute to a scale of business that will just topple anybody in everybody that comes in their way. The market also has Cinepolis India Pvt. Ltd. and Miraj Cinemas, and many others that are businesses run on a fairly significant size and scale.

In this business, when it comes to negotiating the commercials or the terms of play, like the way water flows it will find its own level. It’s important for this entity and the entire exhibition sector to earn money. It’s equally important to have content creators believing in the theatrical medium and have substantial revenues coming from it when these creators choose to come to exhibitors or go straight to streaming.

Content Creators Win Too

I’m sure I echo the sentiments of every other exhibitor in this country in saying this, we may own those assets, but these cinemas are as much a content creator’s assets as they are ours. In terms of the overall revenue pie, the greatest contributing avenue for any movie is still theatrical, and a huge chunk of those revenues that come out of the theatrical medium is given to the producers as their share of the revenues.

It is because this theatrical avenue exists and the numbers that films score up here, that the value they get out of streaming or satellite and various other avenues is often increased because the movie has performed very well at the box office. Let’s say you have a movie like The Kashmir Files, which was released recently. Now, nobody would think that this could do the kind of business that it’s done, having crossed Rs 200 crore of box office collections in cinemas. Picture the kinds of offers that will be coming to the producers of that movie from streaming and satellite platforms. Would those offers have come to them had the film not come to theatres?

The box office sets the benchmark for the valuation of the other rights. If you go to streaming, a show with Nawazuddin Siddiqui, Kay Kay Menon, or Manoj Bajpayee could be more successful than a film with Akshay Kumar or Varun Dhawan on the measurement of views and subscriptions. The box office is the only barometer setting the benchmark for stardom, and the kind of money that is paid for content featuring a certain actor, created by a certain director or filmmaker. That makes the box office, which is a by-product of the theatrical avenue, the only objective benchmark that determines the monetary value of content and content creators. Therefore, its existence is something that’s paramount not just for us exhibitors, but for actors and content creators. Rohit Shetty, Salman Khan, Varun Dhawan, or Ranvir Singh would not have the stature they do if they had not clocked the numbers they do at the box office.

‘Big Change In New-Screen Acquisition’

– Shibasish Sarkar - Film producer; Chairman & CEO, International Media Acq. Corp; former CEO, Reliance Entertainment

Let’s break the impact of this merger into three or four parts, and begin with why it makes sense for PVR and INOX. When the number one and the number two players in the film exhibition space come together, it can be studied from two or three sides of the prism.

Financial Upside, Especially In New-Screen Negotiations

On pure financials, there are three aspects. First, the sheer synergies will allow both companies and especially INOX to get higher rates on their advertising revenue, with a better negotiation position going in with their combined screen portfolio. Second, that stronger combined negotiating position will also bear out on supply chain, food, and beverage contracts, setting combined standard operating procedures with vendors.

The third and most important point is that combined, PVR-INOX will have much more scale and power at the time of negotiating the acquisition of any new screens. For plans of movie screens that come up in any new malls, you won’t have two separate bidders now but one that is combined. They can set a benchmark and the pricing while negotiating with the mall owners in terms of the range and the rates. The quality and the kind of screens that PVR and INOX largely have are those that will cater to mainly large-segment malls and owners. Those pieces of assets will have very few alternative opportunities. The situation earlier was that there were three bidders – PVR, INOX, or Cinepolis for a certain segment. Now two are combined together, and Cinepolis tends to do a format with a large number of screens – between 7 and 12 screens at a property.

On these three financial aspects, there will be a significant opportunity to grow EBIT and margins. Even before we get to cost synergies when there will at some stage be an integration of operations, better negotiations on ad revenues, food, and beverages, ticketing platforms, mall owners – all of these directly improve the bottom line and cash flows.

The combined EBITDA or internal reserves that will accrue within the system will give the merged entity more ammunition for organic growth.

How Competitors, Partners Gain

In terms of the overall film exhibition ecosystem, when two large players combine, the improvement happens at the sector level and percolates to the other players. So far, these two had been competing with each other. As a combined force, the money they have for acquisitions and investments will be more, so the overall space grows.

It is an interesting move even for other stakeholders in the overall film industry. How does this change the life of the producers or other value chain partners? I don’t see an immediate change in the situation just because you are a stronger exhibitor partner now. Even earlier, for the national multiplexes, most of the negotiations used to happen together. This is a positive sign for the overall film industry, and will only give more impetus to its growth.

Dealing With The Streaming Challenge

As a producer, I don’t see streaming and exhibition cannibalising each other right now. Outdoor entertainment and indoor home entertainment are two very different experiences. That is not to say there has been no change in consumer habits in the last few years. There is definitely a significant level of content that has come over to the streaming platforms over the last two years. That has allowed people to, get hooked on to and consume a large amount of content from the streaming platforms. A certain level of consumer satisfaction has happened there.

In these last few years, we saw a lot of movies get directly acquired by streaming platforms or adopt a direct-to-digital strategy. As long as a movie goes to a streaming platform after it does a theatrical window, the exhibition sector is not affected.

With more investments going into screens as a result of such a merger, the quality of the film watcher’s experience will improve, and on a long-term basis, audiences will probably come back to theatres more and more.

‘Assess Impact On Films Once Merger Is Completed’

– Taran Adarsh - Film critic and cinema trade analyst

To be very honest, I was a bit surprised when I read the announcement of the PVR-INOX merger. Having said that, I think it’s a great collaboration and partnership from their point of view – that two giants are joining hands.

Now, how does the industry react? There will be some who would be in favour, others not. Among those who are outsiders that have nothing to do with the deal, a lot of people might feel that this would lead to a monopoly in terms of the exhibition of movies, the terms people are offered, or revenue sharing. Having said that, I think it’s a bit too early to jump the gun and draw conclusions. A clearer picture would emerge only once the merger happens and when the forthcoming films are released at the properties.

On ticket pricing, fluctuations happen even now when a big film releases. Ticket rates are hiked for an ‘event film’, as has happened with the current release RRR. Prices go up over the weekend but come down over weekdays. I feel that will continue only during event films. On a personal level, I have voiced my opinion on high ticket prices and asked for them to be affordable to the common man. But then, it’s the exhibitors’ business and they know how to run it better. What we can do is voice an opinion, it’s up to exhibitors to implement it or not. It’s their business, properties, which they know well.

The views expressed here are those of the authors, and do not necessarily represent the views of BloombergQuint or its editorial team.