BENGALURU/MUMBAI : PVR Ltd was looking at a merger with Cinepolis India, reports had said for some time now. Against this backdrop, PVR’s and Inox Leisure Ltd’s announcement of a merger on Sunday was unexpected. The two companies together will have more than a 40% market share in terms of box office revenue.
“The merger of PVR and Inox Leisure comes as a surprise given that reports had indicated that the former was in talks to merge with Cinepolis. However, the top two multiplexes have done one better by announcing their merger," said Jinesh Joshi, analyst, Prabhudas Lilladher Pvt. Ltd.
PVR’s management said in a call on Monday that there would be umpteen synergies in revenues and costs from the merger. It would also facilitate large economies of scale. The timing of the announcement is also pertinent. The fear of contracting the coronavirus is receding now and demand for movie watching is likely to see a strong rebound, unless there are fresh curbs driven by a serious spread of covid-19 again. The period film, RRR, released over the weekend, was received well and the movie content pipeline is promising.
Unsurprisingly, investors have given a thumbs up to the deal, especially those of Inox, who will receive three shares in PVR for ten shares of Inox. This swap ratio values the company at a 16% premium vis-a-vis Friday’s closing price when the stock had already risen by 6%. The company’s shares are now trading at ₹523, surpassing its pre-covid high of ₹495 in February 2020. PVR’s shares have increased by 6% in the past two trading days to ₹1,883, nearly 11% below pre-covid highs.
As an analyst seeking anonymity said: “Some of the premium for Inox in this deal can be because of the management control premium paid by PVR." The managing director of the combined entity would be PVR’s Ajay Bijli, while Sanjeev Kumar will be the executive director.
Together, PVR and Inox now operate 1,546 screens across 341 properties. PVR’s management is confident the merger will not fall under the purview of the Competition Commission of India (CCI), whose approval is required for companies with a combined revenue threshold of ₹1,000 crore or more in the last completed fiscal. In FY21, PVR’s and Inox’s revenue was ₹280 crore and ₹106 crore, respectively.
“Combined, PVR Inox (the merged entity), would be in a better position to negotiate lease rentals and demand higher yields for ad revenues given the improved reach," said Joshi.
The merger comes at a time both companies have suffered massive losses for the past two fiscals as the multiplex sector was among the worst hit because of restrictions imposed to contain the spread of coronavirus. Moreover, competition from over-the-top (OTT) platforms has risen with the changed landscape. The deal would enable the companies to battle the OTT threat effectively at least in the near future.
“The combined entity would have sufficient scale and balance sheet strength to counter any possible near-term threats from OTT platforms," said analysts from JM Financial Institutional Securities Ltd in a report on 28 March. In the call, PVR’s management said they will target tier 2 and tier 3 markets, which were not on their radar earlier. Plus, 200 new screens will be opened every year.
“The merged entity would be stronger and could command a premium, given possibilities of synergies driving earnings upgrade," said JM Financial. So far in CY22, shares of both companies have increased by 45-48%, suggesting investors are capturing the brighter picture.
