PVR, Inox Merger May Dodge CCI Review, But For How Long?
A pandemic that crippled their business has also offered PVR and Inox a once-in-a-lifetime opportunity.
A pandemic that crippled the business of India's two leading multiplex operators has also offered them a once-in-a-lifetime opportunity.
A chance to merge and create the largest film exhibition company in India with no immediate review by India's competition authority.
Were it not for the deal timing, the proposed merger between PVR Ltd. and Inox Leisure Ltd. would have surely been scrutinised by the Competition Commission of India for any adverse impact on competition in the sector. And, if approved, it would have most likely faced severe strictures or modifications.
Why? In 2015, PVR's acquisition of the much smaller DT Cinemas (DLF Group-owned) had to seek CCI clearance. The commission allowed the deal but with modifications and a freeze on expansions. At the time, PVR had 467 screens and DT 39, of which 10 were upcoming.
A year before, Carnival Films Pvt. Ltd. with 71 screens also had to seek CCI approval to acquire 238 screens from Reliance MediaWorks Ltd.
Because India's merger control regulations exempt small transactions—where the target (or the entity being merged) has assets below Rs 350 crore or revenue below Rs 1,000 crore in the preceding financial year.
This exemption was available till March 29, 2022, and was extended by five years earlier this month.
By announcing the deal on March 27, before the financial year ended, PVR and Inox have used FY21, their worst year due to pandemic-led closures, to qualify for the exemption.
Adversity has created opportunity—the merger will not require CCI approval.
But shouldn't it?
Any deal involving the two largest players in a market combining to create clear blue water between itself and its rivals is bound to interest competition law authorities to assess the impact on consumers, vendors, and competitors, said Karan Chandhiok, partner at law firm Chandhiok & Mahajan.
"From a competition perspective, the proposed deal raises concerns—it creates a virtual monopolist in the market of multiplexes," according to Nisha Kaur Uberoi, national head of the competition law practice at Trilegal.
Chandhiok is of the opinion that while the merging parties don't need to notify CCI, the regulator can use its power to inquire into agreements that are likely to cause an 'appreciable adverse effect' on competition in India.
The commission does have powers under Section 3 of the Competition Act to inquire into agreements, if such agreements are likely to cause an appreciable adverse effect on competition in India. The CCI, on its own or on the basis of a complaint, can inquire into the potential impact of such transaction on the multiplex market (i.e., the interaction between competitors) and the downstream and upstream markets.Karan Chandhiok, Partner, Chandhiok & Mahajan
But, say other lawyers, the commission has never used that power to regulate a combination. Combinations are governed by a separate provision in the law and this one is clearly exempt.
The CCI, unlike its counterparts in the U.S. and EU, currently does not have the ability to review a non-notifiable deal, said Kaur Uberoi.
While there's no scope for the CCI to intervene at this stage, she noted that it does though have the ability to examine the conduct of the combined entity, if the combined entity abuses its dominance.
The CCI can take suo motu cognisance or act on the basis of a complaint (for instance if the combined entity were to refuse to screen films from a particular production house resulting in market foreclosure) and initiate an investigation if it comes to a prima facie view that there is merit in an abuse of dominance complaint.Nisha Kaur Uberoi, National Head - Competition Law Practice, Trilegal
If CCI Comes Knocking
"Movies get monetised everywhere," PVR Chairman Ajay Bijli said in a media interview after announcing the deal.
That digital age reality will likely be PVR Inox's defence if the CCI were to move against it whether before the merger on concerns of adverse impact on competition or after the merger on grounds of abuse of dominance.
To determine deal impact, the regulator would first have to define the relevant market before arriving at market share or concentration.
→ If it is multiplex cinemas, then PVR Inox will have a substantial 44% to 50% market share, according to one estimate by Emkay Research.
→ If it is all cinemas, then PVR Inox will have less than a fifth of the total screens in India, as per data in the Emkay report.
→ Add OTT platforms to the mix and PVR Inox's share stands further diluted.
In the 2015-16 PVR-DT deal, CCI determined the product market to be multiplexes and high-end single theatres as they tend to attract a similar clientele. It observed the geographical market to be narrower than city-wide as cinemagoers are reluctant to travel long distances to watch a movie.
So the relevant markets (to determine market share) ranged from multiplexes in Gurgaon, Noida and Chandigarh to multiplexes plus high-end single-screen theatres in South, North, West and Central Delhi.
In this instance, said Kaur Uberoi, there are certain cities/areas where there is no presence of rival multiplex operators, effectively creating a monopoly on relevant geographic market basis.
Any competition analysis will be further nuanced based on affected stakeholder groups.
Film producers/distributors—who may be looking to sell rights nationally or regionally (territory-wise).
Competitors—such as single screen theatres and other multiplex companies who compete locally and nationally.
Vendors, suppliers, ticketing platforms—some of whom may supply only to multiplexes.
Cinemagoers—whose neighbourhood multiplexes may soon be owned by one company.
The availability of choice to consumers post-merger, the effect the deal will have on ticket and other amenity prices, and bargaining power of the combined entity are some of the key considerations from a competition perspective.Karan Chandhiok, Partner, Chandhiok & Mahajan
This deal will severely affect countervailing power between upstream and downstream players in the market, said Kaur Uberoi. She cited as illustration the past case in which the CCI had noted exclusivity agreements between real estate developers and multiplex operators, when it assessed pipeline businesses.
"In this instance, commercial real estate players will also be disadvantaged as there would be one less player to negotiate rates/leases for integrating multiplexes into commercial spaces."
Based on such analysis, were the CCI to find anti-competitive behaviour or abuse of dominance it could order such behaviour to stop, direct structural and behavioral remedies such as ticket-price caps or divestiture of screens, impose a fine or even split the enterprise—a power it has never used to date.
The Flipside Of Scale
"A tectonic shift is taking place in the multiplex industry," noted an ICICI Securities report.
According to Emkay Research, "the merger will create a large entity with better negotiating power across the length of business partners and better cost management as well."
Brokerage Prabhudas Lilladher described the deal as a win-win that would "lend invincible size advantage to the combined entity and result in material revenue and cost synergies by improving bargaining power with film distributors, real estate developers, ad-networks and ticket aggregators".
It added that the "merger will relegate competition to backyard—Carnival and Cinepolis have ~400 screens each."
Investors have applauded the deal for the scale and muscle it gives PVR INOX. The important question for other stakeholders and the CCI is how the merged entity puts that to use... or abuse.