Shares of PVR and INOX Leisure opened at a record 52-week high on Monday, after the two cinema operators announced their merger. The combined entity is expected to become the largest film exhibition company in India, with over 1500 screens. Shares of PVR jumped 10% at Rs 2010.35 per share on the Bombay Stock Exchange, while shares of INOX Leisure soared nearly 20% to Rs 563.60 per share on the benchmark stock index. Brokerage firm JM Financial sees an upside of 47% on Inox stock and an upside of 28% on PVR’s stock from Friday’s close.
Share swap agreement favours INOX
INOX will merge with PVR in a share swap ratio of 3 shares of PVR for every 10 shares of INOX, the companies announced in separate stock exchange filings on Sunday. The combined entity will be rebranded PVR INOX Ltd and will have a network of 1546 theatres.
In the deal, however, the swap ratio favours Inox shareholders slightly, using current market caps as the benchmark, JM Financial said Monday. “A 15x target multiple on the combined EBITDA would yield a Mar’23 TP (target price) of INR 2,300 per share for the post-merger PVR stock and INR 690 for Inox. In such a scenario, we see 47% upside on Inox and 28% upside on PVR vs Friday’s close,” the brokerage added.
Game changing event
Investec said the announcement of a merged entity translates into a game changing event in the film exhibition industry. “We believe there will be revenue and cost synergies across several line items and will result in the merged entity to be more profitable and more valuable as compared to sum of its parts,” it said in a note. The combined company will constitute total nearly half of total multiplex screens and about 28% of total domestic theatrical revenue, it added.
JM Financial also said the merged entity would offer complementarity in geographies, provides some scope for ‘premiumisation’ especially w.r.t Inox’s metrics, and will likely offer cost synergies.
OTT platforms: A challenge
Brokerage Motilal Oswal said Monday it maintains a Neutral rating on PVR stock at target price of Rs 1600 apiece, adding that it sees digital platforms pose a risk to cinema operators. “The rich valuation it commanded historically was led by strong growth. The screen addition opportunity does provide an ability to continue its strong growth. However, OTT platforms pose a risk of shrinking the exclusive period, softening occupancies, and lower screen economics,” Motilal Oswal said.
Cinemas, like other service sectors, were among the worst affected following the COVID-19 pandemic. OTT (over the top) or the digital space has since emerged as a strong contender to cinema operators. In the merger announcement, the companies acknowledge the challenge posed by OTT. “The film exhibition sector has been one of the worst impacted sectors on account of the pandemic and creating scale to achieve efficiencies is critical for the long term survival of the business and fight the onslaught of digital OTT platforms,” Ajay Bijli, Chairman and Managing Director of PVR said.
Motilal Oswal said domestic theatricals contribute the highest source of film revenue, but the share of Digital/OTT is rising. Share of domestic theatres to film’s revenue has fallen marginally to 60% in 2019 to 62% in 2017, while the share of OTT platforms to the revenue of a film has risen to 10% in 2019 from 5% in 2017, the brokerage added.