Table of Contents

1. Executive Summary
2. Introduction
3. Merger Overview
4. Valuation Methodology
5. Detailed DCF Model
o Assumptions
o Free Cash Flow Forecast
o Terminal Value Calculation
o Discount Rate (WACC)
o Present Value of Cash Flows
6. Deal Structuring
7. Due Diligence
8. Regulatory Approvals
9. Integration and Implementation
10. Conclusion
11. References

1. Executive Summary

The merger between PVR Ltd. and INOX Leisure Ltd. represents a landmark consolidation in
the Indian cinema industry, forming the largest multiplex chain in the country. This report,
authored from the perspective of an investment banker, provides a comprehensive analysis of
the merger process, including strategic rationale, valuation methodology, and a detailed
Discounted Cash Flow (DCF) model to estimate the value of the combined entity.

2. Introduction

The Indian cinema industry, a rapidly evolving sector characterized by increasing

competition and changing consumer preferences, witnessed a significant merger between
PVR Ltd. and INOX Leisure Ltd. Announced in March 2022 and completed in January 2023,
this merger aims to enhance market leadership, achieve operational efficiencies, and create
shareholder value.

3. Merger Overview

Key Details

• Announcement Date: March 27, 2022

• Completion Date: January 2023
• Share Swap Ratio: INOX shareholders received 3 shares of PVR for every 10 shares
held.
 • Combined Entity: PVR INOX Limited

Strategic Rationale

• Market Leadership: The merged entity commands over 50% of the multiplex market
in India.
• Synergies: Expected cost savings of ₹150-200 Crore per year through operational
efficiencies, reduced overheads, and economies of scale.
• Enhanced Bargaining Power: Improved content acquisition and increased
advertising revenues.

4. Valuation Methodology

The valuation of the merged entity is carried out using the Discounted Cash Flow (DCF)
method, which involves forecasting future cash flows and discounting them to their present
value using a discount rate that reflects the risk associated with those cash flows. This
method is widely regarded as the most accurate approach for valuing a company, particularly
in the context of mergers and acquisitions.

5. Detailed DCF Model

Assumptions

The DCF model is built on several key assumptions, which are based on historical data,
industry benchmarks, and future projections:

• Revenue Growth Rate: 10% per annum

• EBITDA Margin: 20%
• Tax Rate: 30%
• Capital Expenditures (CapEx): 5% of revenue
• Discount Rate (WACC): 10%
• Terminal Growth Rate: 3%

Free Cash Flow Forecast

Free Cash Flow (FCF) represents the cash generated by the company that is available for
distribution to all the stakeholders. The forecast involves estimating revenue, operating
expenses, taxes, capital expenditures, and changes in working capital.
 Change
Revenue EBIT NOPAT CapEx FCF
EBITDA Depreciation Tax (₹ in WC
Year (₹ (₹ (₹ (₹ (₹
(₹ Crore) (₹ Crore) Crore) (₹
Crore) Crore) Crore) Crore) Crore)
Crore)
1 2,625.59 525.12 150.00 375.12 112.54 262.58 131.28 50.00 81.30
2 2,888.15 577.63 165.00 412.63 123.79 288.84 144.41 55.00 89.43
3 3,176.97 635.39 181.50 453.89 136.17 317.72 158.85 60.50 98.37
4 3,494.67 698.93 199.65 499.28 149.78 349.50 174.73 66.55 108.22
5 3,844.14 768.83 219.61 549.22 164.77 384.45 192.21 73.21 119.03

Terminal Value Calculation

The terminal value represents the value of the company beyond the forecast period, assuming
a perpetual growth rate. It is calculated using the Gordon Growth Model:

Terminal Value=Final Year FCF×(1+Terminal Growth Rate)Discount Rate−Terminal Growt

h RateTerminal Value=Discount Rate−Terminal Growth RateFinal Year FCF×(1+Terminal
Growth Rate)

Using the assumptions:

Terminal Value=119.03×(1+0.03)0.10−0.03=119.03×1.030.07=1,751.92 CroreTerminal Valu

e=0.10−0.03119.03×(1+0.03)=0.07119.03×1.03=1,751.92 Crore

Discount Rate (WACC)

The Weighted Average Cost of Capital (WACC) is used as the discount rate in the DCF
model. It reflects the cost of equity and debt, weighted by their respective proportions in the
capital structure. For this analysis, a WACC of 10% is assumed.

Present Value of Cash Flows

The present value of the forecasted free cash flows and terminal value is calculated using the
WACC. The formula for the present value of future cash flows is:

PV=FCF(1+WACC)tPV=(1+WACC)tFCF

Where tt is the year number.

Year FCF (₹ Crore) PV Factor PV of FCF (₹ Crore)

1 81.30 0.9091 73.91
2 89.43 0.8264 73.89
3 98.37 0.7513 73.75
4 108.22 0.6830 73.50
5 119.03 0.6209 73.13
Terminal Value 1,751.92 0.6209 1,085.70
Net Present Value (NPV) Calculation

The NPV is the sum of the present value of the forecasted free cash flows and the present
value of the terminal value.

NPV=∑PV of FCF+PV of Terminal ValueNPV=∑PV of FCF+PV of Terminal Value

NPV=73.91+73.89+73.75+73.50+73.13+1,085.70=1,453.88 CroreNPV=73.91+73.89+73.75
+73.50+73.13+1,085.70=1,453.88 Crore

6. Deal Structuring

As an investment banker, structuring the deal involves determining the appropriate share
swap ratio, ownership structure, and governance model. For the PVR-INOX merger, the
share swap ratio was 3 shares of PVR for every 10 shares of INOX. The combined entity
retained the name PVR INOX Limited, with board representation from both companies.

7. Due Diligence

Due diligence is a critical step in the merger process, involving a thorough review of
financial, legal, operational, and regulatory aspects to ensure that there are no hidden
liabilities or risks.

Financial Due Diligence

• Review of Financial Statements: Analyze historical financial statements, revenue

trends, cost structures, and profitability.
• Debt and Liabilities: Assess the debt levels, off-balance-sheet liabilities, and
contingent liabilities.

Legal Due Diligence

• Contracts and Agreements: Examine key contracts, including leases, supplier

agreements, and customer contracts.
• Litigation and Compliance: Investigate ongoing or potential litigation and ensure
compliance with regulatory requirements.

8. Regulatory Approvals

Obtaining regulatory approvals is essential for the successful completion of the merger.

Competition Commission of India (CCI)

• Approval Process: Submit the merger proposal to the CCI to ensure that the merger
does not create unfair market dominance.
• Conditions: The CCI may impose conditions to ensure fair competition in the market.

Stock Exchanges

• No-Objection Certificates: Obtain no-objection certificates from the Bombay Stock

Exchange (BSE) and the National Stock Exchange (NSE).

9. Integration and Implementation

Effective integration is crucial for realizing the synergies and strategic benefits of the merger.

Internal Communication

• Employee Communication: Communicate the merger plan to employees, addressing

potential concerns and outlining the integration process.

External Communication
 • Stakeholder Communication: Announce the merger to shareholders, customers, and
the public, highlighting the strategic benefits and expected synergies.

Integration Planning

• Operational Integration: Develop a detailed integration plan to combine operations,

systems, and cultures of both companies.
• Monitoring and Adjustments: Continuously monitor the integration process and
make necessary adjustments to ensure smooth execution.

10. Conclusion

The merger between PVR Ltd. and INOX Leisure Ltd. creates a dominant player in the
Indian cinema industry, with significant synergies and strategic advantages. The DCF model
provides a detailed valuation of the merged entity, demonstrating its financial viability and
growth potential. As an investment banker, this comprehensive analysis and structured
approach help in understanding the merger's impact and the value it creates for shareholders.

11. References

1. PVR Ltd. Annual Report FY 2021-2022

2. INOX Leisure Ltd. Annual Report FY 2021-2022
3. Competition Commission of India (CCI) Approval Documents
4. AlphaSpread. (2023). PVR-INOX DCF Valuation

At last what I do as a intern

Sure, I can guide you through the steps of handling the PVR and INOX merger deal from an
investment banking perspective and explain how to construct a detailed DCF model for your
report.

Section 1: Understanding the Merger

1.1 Introduction to the Companies

• PVR Ltd: Overview, history, market position, financial highlights.

• INOX Leisure Ltd: Overview, history, market position, financial highlights.

1.2 Strategic Rationale for the Merger

 • Market consolidation.
• Synergies (cost savings, enhanced market reach).
• Enhanced bargaining power with distributors and advertisers.

Section 2: Steps in the M&A Process

2.1 Preliminary Assessment

• Initial Analysis: Evaluate strategic fit, potential synergies, and financial health.
• Engagement: Discussion with senior management of both companies.

2.2 Due Diligence

• Financial Due Diligence: Reviewing financial statements, assessing profitability,

cash flow, and liabilities.
• Legal Due Diligence: Ensuring no pending litigations or legal issues.
• Operational Due Diligence: Examining operational efficiencies, integration issues,
and synergy potential.

2.3 Valuation

• Comparable Company Analysis: Comparing PVR and INOX with similar

companies in the industry.
• Precedent Transactions Analysis: Examining previous M&A deals in the cinema
industry.
• Discounted Cash Flow (DCF) Analysis: Detailed below.

2.4 Deal Structuring

• Negotiation: Discussing terms, price, and payment methods (cash, stock, or a

combination).
• Financing: Deciding on how to finance the deal (debt, equity, or internal cash).

2.5 Regulatory Approvals

• Compliance: Ensuring compliance with SEBI regulations and Competition

Commission of India (CCI) approval.

2.6 Integration Planning

• Post-Merger Integration: Planning for cultural integration, operational integration,

and achieving synergies.

Section 3: Detailed DCF Model

3.1 Understanding DCF

• Concept: Present value of projected free cash flows.

• Formula: DCF=∑FCFt(1+r)tDCF=∑(1+r)tFCFt where FCFFCF is Free Cash
Flow, rr is discount rate, and tt is time period.
3.2 Building the DCF Model

3.2.1 Projecting Free Cash Flows

• Revenue Projections: Estimate future revenues based on historical data and growth
projections.
• Cost Projections: Estimate costs, including COGS, SG&A, and other operating
expenses.
• Capital Expenditures: Estimate future capital investments.
• Working Capital Changes: Estimate changes in working capital requirements.

3.2.2 Calculating Free Cash Flow

• Formula: FCF = EBIT(1 - Tax Rate) + Depreciation & Amortization - CapEx -

\Delta Working Capital

3.2.3 Determining the Discount Rate

• Weighted Average Cost of Capital (WACC): Calculate WACC using the

formula:WACC=EV⋅Re+DV⋅Rd⋅(1−Tc)WACC=VE⋅Re+VD⋅Rd⋅(1−Tc) where EE is
market value of equity, DD is market value of debt, VV is total value (E+D), ReRe is
cost of equity, RdRd is cost of debt, and TcTc is corporate tax rate.

3.2.4 Terminal Value Calculation

• Gordon Growth Model: TV=FCFn+1(r−g)TV=(r−g)FCFn+1 where TVTV is

terminal value, FCFn+1FCFn+1 is free cash flow in the final projected year, rr is
discount rate, and gg is growth rate.

3.2.5 Summing Up

• Enterprise Value Calculation: Sum of the present value of projected free cash flows
and the present value of terminal value.
• Equity Value Calculation: Subtract net debt from enterprise value to get equity
value.

Section 4: Report Compilation

4.1 Executive Summary

• Brief overview of the merger, strategic rationale, and key findings from the DCF
analysis.

4.2 Detailed Analysis Sections

• Each section of the merger process and the DCF model, with detailed explanations,
calculations, and assumptions.

4.3 Visual Aids

 • Include charts, graphs, and tables to illustrate financial projections, DCF calculations,
and integration plans.

4.4 Conclusion

• Summarize the expected benefits of the merger, potential risks, and overall impact on
stakeholders.