Merger boost: Inox Leisure zooms 20%, hits record high; PVR jumps 10%

Shares of PVR and Inox Leisure zoomed up to 20 percent on the BSE in Monday’s intra-day trade after they announced a merger between the two major multiplex owners, in an all-stock amalgamation of Inox with PVR. Shareholders of Inox will receive three shares of PVR in exchange for 10 shares in Inox.

In trades so far, Inox Leisure hit a record high of Rs 563.60, zooming 20 percent in intra-day trade. The stock surpassed its previous high of Rs 510.80 touched on February 25, 2020. As of 09:17 am, the stock traded 15 percent higher at Rs 540, as compared to a 0.06 percent decline on the S&P BSE Sensex.

PVR, meanwhile, surged 10 percent to Rs 2,010, also its 52-week high on the BSE. The stock trimmed gains mildly and was up 5 percent at Rs 1,925.25 later. It had hit a record high of Rs 2,081 on February 20, 2020.

Post-merger, PVR promoters will own a 10.62 percent stake while Inox promoters will have a 16.66 percent stake in the combined entity with equal representation in the board with two seats each for promoter entities in a 10-member board. The combined entity will be named PVR INOX Limited with the branding of existing screens to continue as PVR and INOX respectively. The new cinemas opened post the merger will be branded as PVR INOX.

The combined entity will become the largest film exhibition company in India with 1,546 screens, at around 50 percent multiplex screen market share and around 42 percent box office collection market share.

The key synergy of both companies will be bargaining power in costs (especially rental) wherein they compete for premium space as well revenues such as advertisement [wherein Inox whose normalized (pre-covid) ad/screen/annum was at Rs 29 lakh vs. Rs 44 lakh for PVR ~36 percent discount] or ATP discount of 6-7 percent between Inox and PVR, which could catch up, ICICI Securities said in a note.

Furthermore, they would have higher leverage inconvenience fee deals (with Bookmyshow and Paytm) and distribution revenues. Some administrative cost rationalization on overlaps is also possible. Even the combined entity target multiple and subsequent market value could be rerated given superior market share and reach and synergy mentioned above.

While given the target company’s (Inox) turnover is less than Rs 1,000 crore, the merger may get “de-minimus exemption from CCI approval”, roadblocks would be CCI clearance if assessed on-screen market share (as they have more than 50 percent share in multiplex screen in most states) or normalized situation revenues, the brokerage firm said.

The valuation on a standalone basis is largely fair, however, the combined entity valuation can be higher by 25-30 percent basis 1) synergies on various metrics as mentioned above and 2) re-rating due to the large size of the entity, analyst at Elara Capital said.

In terms of management control, we believe it will augur well if PVR has control in the initial years as the latter has better brand equity vs that of Inox; we need to monitor in terms of who gets the control over the medium to long term. As indicated by exchanges, currently both promoters will have equal board seats in the entity, the brokerage firm said.