PVR, Inox Shares Surge As Analysts See Merger Plan Aiding Bargaining Power
Shares of PVR Ltd. and Inox Leisure Ltd. surged as analysts expect their proposed merger to offer a competitive advantage over other multiplex operators, as well as drive pricing and bargaining power in terms of newer technologies, rentals and marketing spends, among others.
The boards of India’s two largest multiplex operators have approved an all-stock amalgamation to create a threatre chain with a network of more than 1,500 screens, according to exchange filings on Sunday. PVR promoters will hold a 10.62% stake in the combined entity, while Inox promoters will have a 16.66% stake. The existing properties will continue to use their respective brands, but the new screens will be branded as PVR Inox.
The deal comes at a time their revenue has taken a hit in the last two years as the Covid-19 pandemic forced movie halls to suspend operations, and amid challenges from online streaming platforms. That means the transaction may not have to go through the Competition Commission of India’s scrutiny.
Their combined revenue is well below the prescribed minimum threshold of Rs 1,000 crore. PVR’s revenue from operations fell from Rs 3,284 crore in FY20 to Rs 225.7 crore in FY21. Inox’s revenue declined to Rs 98.74 crore in FY21 from Rs 1,887 crore in FY20.
The Indian multiplex industry had largely been a four-player market pre-pandemic (65% of multiplex screens) with PVR, Inox, Carnival and Cinepolis having the largest number of screens. If the PVR-Inox merger deal goes through, the combined entity will have a 50% share of the total multiplex screens in the country at the end of FY22. This share may rise as the merged entity may gain from smaller chains and single screens that have struggled due to the pandemic.
The deal is subject to regulatory approvals.
Shares of PVR rose 10%, while Inox Leisure surged 20% in early trade on Monday. The stocks, however, pared some gains to trade 4.77% and 13.26%, respectively, as of 11:25 a.m.
Of the 31 analysts tracking PVR, 26 maintain a ‘buy’, three suggest a ‘hold’ and two recommend a ‘sell’, according to Bloomberg data. The 12-month consensus price target implies an upside of 1%.
Of the 22 analysts tracking Inox, 20 maintain a ‘buy’ and two suggest ‘hold’. The consensus price target implies a downside of 2.7%.
Here’s what analysts have to say on the proposed deal:
The acquisition is a big win-win for the cinema industry and will benefit both the players with a higher positive bias towards Inox based on the share-swap arrangement.
The current valuation of the merged entity is Rs 17,400 crore and has the potential of reaching over Rs 22,000 crore by FY24.
It estimates that the revenue of the combined entity will reach Rs 6,800 crore by FY24.
In terms of box office revenue, both entities have a combined share of 42% (Hindi and English content that has a 65% share in overall box office industry), which becomes irreplaceable—certainly, a monopolistic market approach.
In terms of ticket prices/spend per head, too, Inox is at a 5%/25% discount versus that of PVR. The brokerage expects Inox to move toward rapid premiumisation in line with PVR. New technologies like 3D, 4DX and other luxury offerings will drive ticket prices higher.
The merged entity will have a screen share of 50% within India multiplexes and a share of 18% within overall screens; it will lead to a broader presence on pan-India basis; PVR is stronger in the north, west and south, whereas Inox has more screens in the east. This will be a huge competitive advantage over other multiplex operators, in terms of brand recall and brand equity.
There may be a lot of opposition from the film trade and fraternity fearing a hike in distributor share as the entities have a commanding box office position. Some kind of assurance from the exhibitors for not increasing distributor share will augur well for the film trade and distributors.
It sees the merger as significantly shareholder value-accretive as it improves bargaining power vis-a-vis various stakeholders in the film exhibition ecosystem—advertisers, film producers, consumers, ticketing players, etc.
It also sees revenue and cost synergies. On the revenue front, the biggest synergy benefit will be in the form of higher pricing power in advertising for Inox whose advertising revenue per screen was 35% below PVR’s in FY20.
Getting the CCI approval is the biggest risk to this deal. In a much smaller deal between PVR and DT Cinemas in 2016, some screens had to be divested for the deal to be cleared by the CCI. PVR-Inox may need to shed screens in key metros like Delhi, Mumbai, etc. if this rule is applied again by the CCI. All is well if the CCI rules don’t come into play. The deal could benefit from ‘exemption available to transactions involving small targets’.
No significant competitor in the industry could create room for new entrants. India will likely be a 3,150-3,200-screen industry as of FY22 (excluding Carnival screens, which is financially weak)—significantly smaller than China, which is apparently at 80,000 screens. This could happen if some of the smaller chains get funding from private equity firms or from deep-pocketed corporates who are looking at profitable diversifications in the consumer discretionary space.
With a strong content pipeline, healthy Q4 FY22 earnings and mega consolidation, the near-term outlook remains positive for both PVR and Inox. Merger ratio favours a 10-15% outperformance for Inox over PVR.
The combined entity will have much higher bargaining power in terms of rentals, content cost, marketing spends, F&B sourcing, and savings in many cost items.
Consolidation for long-term sustainability of business and threat from OTT has been a key rationale. The growth of digital OTT platforms due to higher mobile internet penetration, low cost of internet data, ease of access, multi-homing, free content and low subscription charges has already begun to have an impact and will continue to impose significant pressures on the theatrical business.