PVR & Inox Announce Merger; Ajay Bijli To Spearhead

The acquisition is a big win-win for the cinema industry and will equally benefit both the players with a higher positive bias towards Inox

PVR and Inox on Sunday announced the merger of their two companies in what may well be one of the biggest business deals of the year. "Merger to bring together two of India's best cinema brands to deliver an unparalleled consumer experience with a network of more than 1,500 screens," Inox said in a statement.

Shareholders of Inox will get PVR shares in a pre-approved 'swap' ratio of 3:10; this means three equity shares of PVR can be swapped for 10 of Inox. Inox will have a 16.66 per cent stake in the new firm and PVR will have 10.62 per cent stake.

It was also decided that PVR Chairman Ajay Bijli will be the Managing Director of the combined entity and Sanjeev Kumar would be appointed as the Executive Director.

Chairman of INOX Group Pavan Kumar Jain will be appointed as the Non-Executive Chairman of the Board. Siddharth Jain will be appointed as Non-Executive Non-Independent Director in the combined entity, said the two firms in separate exchange filings.

The merger is subject to approval by shareholders of both companies as well as the Securities and Exchange Board of India (Sebi), stock exchanges, and other regulatory approvals as required, the statement added.

Elara Capital's Karan Taurani explains how this merger will prove rather positive for both - PVR and Inox.

Synergy on ad revenue and convenience fee - near term benefit

Inox’s ad revenue per screen is at a 33% discount vs that of PVR as of FY20. Both entities getting merged will lead to better yields on advertising, wherein Inox will come on par with PVR and the combined entity may even command a further premium over the medium term. In terms of convenience fee too, Inox derives a much lower convenience fee per screen (50% lower than PvR), which too will be revised upwards. We believe there is a synergy benefit of INR 150cr on EBITDA due to the above two metrics ( about INR 90cr/60cr benefit on ad/convenience fee respectively)


Monopolistic market approach - 40% + Box Office share

In terms of Box Office revenue, both entities have a combined Box Office share of ~42% (Hindi and English content), which becomes irreplaceable. Market share May trend up as the combined entity may gain from smaller chains and single screens that have struggle led due to the Covid situation 


Premiumisation is the way to go - Synergy on other metrics (SPH, ATP) to only come over the medium term

In terms of ticket prices and spend per head too, Inox is at a 5%- 25% discount vs that of PVR; we expect Inox to move towards rapid premiumisation in line with PVR. Use of tech tech - 3D and 4D and other new technologies will drive ticket prices higher. Further, introduction of gourmet food will drive spend her head metric higher. We believe advantage on SPH and ATP in terms of synergy will come in the medium to long term, as it is based on location and consumer 


Broad-based presence

The merged entity will have a screen share of 50% within India multiplexes and also have a broad-based presence in pan India; PVR is stronger in the north, west and south whereas Inox has more screens in the East 


Valuation

In terms of target valuation multiples, PVR would get an EV/EBITDA multiple of 14x one-year fwd and Inox would get at 11x one-year fwd. Basis the synergies, we believe the combined entity has the potential to trade at a higher multiple of even 15-16x one year forward; this in turn would imply a higher upside for Inox currently than that of PVR. 


"We believe the above acquisition is a big win-win for the cinema industry and will equally benefit both the players with a higher positive bias towards Inox; based on the share swap arrangement, INOL valuation has been pegged at INR 65bn ( EV per screen of INR 10 cr) whereas PVR is at a valuation of INR 110bn (EV per screen of INR 11.5cr). The valuation on a standalone basis is largely fair, however, the combined entity valuation can be higher by 25-30% basis 1) synergies on various metrics as mentioned above and 2) re-rating due to the large size of the entity. 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. _

We maintain our BUY rating on both PVR/Inox; currently have a TP of INR 2,375 and 575, will monitor further developments - but there is a high likelihood of a 15-20% upgrade on the target prices due to synergy and re-rating," he adds.

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