PVR-INOX deal arrives at relevant time

“The merger of PVR and Inox Leisure comes as a surprise as reports indicated that the former was in talks for a merger with Cinepolis. However, the top two multiplexes have done a better job by announcing their merger,” said Jinesh Joshi, Analyst, Prabhudas Lilladher Pvt Ltd.

PVR’s management said in a call on Monday that the merger would result in multiple synergies in revenue and cost. It will also facilitate economies of scale. The timing of the announcement is also relevant. The fear of contracting the coronavirus is now easing and the demand for film watching is likely to see a strong rebound, unless there are new restrictions prompted by the severe spread of COVID-19 again. A period film that released over the weekend, RRR received a good response and the film’s content pipeline is promising.

Unsurprisingly, investors have given a thumbs up to the deal, especially Inox, who will receive three shares in PVR for ten shares of Inox. This swap ratio values ​​the company at a 16% premium compared to Friday’s closing price when the stock was already up 6%. The company’s shares are now trading at 523, surpassed its pre-Covid high 495 in February 2020. PVR shares are up 6% in the last two trading days 1,883, down nearly 11% from pre-Covid highs.

As one analyst who asked for anonymity said: “Some of the premium for Inox in this deal may be due to management control premiums paid by PVR.” PVR’s Ajay Bijli will be the managing director of the combined entity, while Sanjeev Kumar will be the executive. the director.

PVR and INOX together now operate 1,546 screens across 341 properties. PVR’s management is confident that the merger will not come under the purview of the Competition Commission of India (CCI), whose approval is required for companies with aggregate revenue limits. 1,000 crore or more in the last full financial year. In FY21, the revenue of PVR and Inox was 280 crores and 106 crores respectively.

“Combinedly, PVR INOX (the merged entity) will be in a better position to negotiate lease rentals and demand higher yields for advertising revenue given better reach,” Joshi said.

The merger comes at a time when both the companies have suffered huge losses in the last two financial years as the multiplex sector was the worst affected due to restrictions imposed to contain the spread of coronavirus. Moreover, with the changing landscape, competition from over-the-top (OTT) platforms has increased. The deal will enable companies to effectively fight the OTT menace, at least in the near future.

“The combined entity will have sufficient scale and balance sheet strength to counter any potential near-term threats from the OTT platform,” analysts at JM Financial Institutional Securities Ltd said in a report on March 28. In the call, PVR’s management said they would target tier 2 and tier 3 markets, which were not on their radar before. Also, 200 new screens will be opened every year.

“The merged entity will be stronger and earn a premium, which can increase the possibilities of synergies,” JM Financial said. Shares of both companies have risen 45-48% so far in CY22, suggesting that investors are capturing a brighter picture.