PVR, INOX merger leads to rally in shares: Synergies from the deal

PVR, Inox deal
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PVR and Inox shares soared to their 52-week high levels on Monday afternoon, after the companies announced an all stock deal merger. PVR shares ended 4% higher to Rs 1,886, while Inox shares closed 12% higher to 524.90 on BSE. 

PVR and INOX announced their merger in an all-stock deal on Sunday. The merger will create India's largest film screening company with 1546 screens in 109 cities. Let us look at the merger details.

About INOX and PVR

  • As of March 2022, INOX Leisure has 160 multiplexes and 675 screens in 72 cities of the country.
  • PVR currently operates 871 screens across 181 properties in 73 cities.
  • PVR’s revenue from operations was Rs 3,284 crore in FY20, and it went down drastically to Rs 225.72 crore in FY21. 
  • Similarly, INOX’s revenues fell from Rs 1,887 crore in FY20 to Rs 98.74 crore in FY21.

Merger details

  • The multiplex industry was severely hit by the pandemic. The industry is looking for a turnaround as Covid cases have reduced drastically. The merger is at the right time and the right step towards it.
  • The merger proposal has been approved by the boards of both companies in Sunday's meeting.
  • INOX Leisure is going to merge with PVR. INOX shareholders will receive three shares of PVR for every 10 shares they hold in INOX. 
  • Post the merger, the merged entity will be called PVR INOX Ltd. The existing multiplexes will retain the names, but the new cinemas going to open post-merger will be branded as PVR INOX.
  • The merged entity will be led by Ajay Bijli as the Managing Director (current chairman and MD of PVR). Sanjeev Bijli will be executive director.
  • The promoters of INOX will become the co-promoters in the amalgamated entity along with the existing promoters of PVR.

New Shareholding pattern

  • The board will be reconstituted post the merger, and it will have 10 members with both promoter families having two seats.
  • PVR promoters will have a 10.62% stake in the merged entity while promoters of INOX will have 16.66% holding.
  • The Bijlis (PVR promoters) at present hold around 17% in PVR. The promoter holding in INOX stands at around 44%.

Synergies from the merger

  • While PVR has dominance in north and south, INOX remains more focussed on eastern and western regions. Hence, a merger will allow these companies an opportunity to expand faster and profitably in their respective markets.
  • PVR operates 871 screens across 181 properties in 73 cities. INOX, on the other hand, owns 675 screens across 160 properties in 72 cities. The combined entity would be operating 1,546 operating screens across 341 properties and 109 cities.
  • “Such a scale would offer substantial bargaining power over the entire ecosystem including customers, real estate developers, content producers, technology service providers, the state exchequer and employees," JM Financial said in a note.
  • The merger is expected to counter the challenges posed by the various OTT platforms and the after-effects of the pandemic. The merged entity will expand in smaller towns.
  • The merged entity will target adding 200 screens every year. PVR and INOX were adding 60-80 screens annually before the pandemic.
  • INOX has a lower share of non-ticketing revenue at 42 per cent against PVR's 48 per cent. This will allow INOX to leverage the scale of the merged entity.
  • Ajay Bijli, CMD, PVR said in a statement, "This is a momentous occasion that brings together two companies with significantly complementary strengths. The partnership of these two brands will put the consumer at the center of its vision and deliver an unparalleled movie-going experience to them."

Merger date

The company has said that the merger process will take six-nine months. They will have to go through the process, and there is the stock exchange, SEBI (Securities and Exchange Board of India), NCLT (National Company Law Tribunal) approvals required.

Brokerage radar

  • CLSA noted that the PVR-INOX merger offers compelling synergy, retaining a ‘Buy’ rating on both stocks. 
  • According to JM Financial, a 15 times target multiple on the combined EBITDA would yield a March 2023 target of Rs 2,300 for the post-merger PVR stock and Rs 690 for INOX. "In such a scenario, we see 47% upside on INOX and 28% upside on PVR over Friday’s close. This is assuming a slightly higher target multiple but not building in any merger synergies."
  • Brokerage firm Nirmal Bang has also maintained a ‘Buy’ rating on both the stocks with target prices of Rs 2,383 on PVR and Rs 594 on INOX, respectively. "The upside could be larger as we believe valuation multiples could expand beyond what we have baked in," it added.
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