PVR-Inox: Merger faces no threat from OTT; CCI approval eyed, say analysts

The proposed merger of PVR and Inox Leisure received a blockbuster response from investors as their shares soared up to 12 per cent on the bourses on Monday. The shares of PVR surged 3 per cent to close at Rs 1,883.5 per share, while those of Inox Leisure ended 12 per cent higher at Rs 535.5 apiece. In comparison, the benchmark S&P BSE Sensex edged 0.4 per cent up.

Analysts now see up to 31 per cent upside in Inox Leisure's stock and 26.5 per cent in PVR as they eye operational synergies, better cash flows and stranglehold over real estate.

On Sunday, PVR and INOX Leisure announced an all-stock merger where investors will receive three shares of PVR for 10 shares of Inox. Post the merger, Inox Promoters will have 16.66 per cent stake while PVR Promoters will have 10.62 per cent stake in the combined entity. The amalgamation is subject to approval of the shareholders and regulators.

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Both promoter groups – PVR and Inox – will hold two board seats in a reconstituted 10 member board, with PVR represented by Ajay Bijli and Sanjeev Kumar as managing director and executive director, while Inox will be represented by Pavan Kumar and Siddharth Jain as non-executive chairman and non-executive director, respectively.

According to analysts, the merger of the two biggest multiplex players offers access to markets across geographies, substantial bargaining power across the value chain, scope for 'premiumisation', and likely cost synergies.

"The new entity can further strengthen existing operations and would look to expand into Tier 2 and 3 markets. Besides, the merged entity could command a premium, given possibilities of synergies driving earnings upgrade," said Manish Agarwal and Sumanyu Saraf of JM Financial.

Currently, PVR is operating 871 screens across 181 properties in 73 cities and Inox has 675 screens across 160 properties in 72 cities. However, post the merger, the combined entity of PVR INOX would have nearly 50 per cent share of the total Indian multiplex screens at the end of FY22. This share, Girish Pai of Nirmal Bang says, will rise going forward as the merged entity has tied up a large part of the retail real estate pipeline, with each having over 1,000 screens lined up to open over the next 5-10 years. "We think this will be the biggest competitive advantage of the merged entity," he said.

Furthermore, around 70 per cent of the multiplex market consists of single screen Cinemas, which are facing a shutdown, whereas multiplexes, with 30 per cent share, are seeing strong growth. Given the large movie market, healthy box office collections, lower number of screens/cinemas, and a concentrated multiplex market, the multiplex market has healthy room to add new screens.

Pai opines this merger is significantly shareholder value accretive for various stakeholders such as advertisers, consumers, film producers, ticketing players, et cetera.

On the cost front, analysts expect corporate office related costs to fall along with sharper negotiations on rentals with mall operators. This, they say, could be another source of savings in the long run and be incrementally positive for free cash flow of the merged entity.

OTT and CII overhang

While announcing the merger, Ajay Bijli of PVR said creating scale to achieve efficiencies is critical for long-term survival of the business and fight the onslaught of digital (over-the-top) OTT platforms.

However, analysts at CLSA believe threat from OTTs remain limited as even during the Covid-19 pandemic, only 40 movies released directly on OTT.

Moreover, PVR and Inox have seen strong bounceback led by compelling movie content, rise in average ticket prices, and food and beverage (F&B) revenue per head surpassing pre-pandemic levels, they added.

"The combined entity would have sufficient scale and balance sheet strength to counter any possible near term threats from OTT platforms. The merger is timely as multiplexes are currently recovering from pandemic and have a strong content pipeline," said JM Financial.

Yet, Motilal Oswal Financial Services cautions that while the screen addition opportunity does provide an ability to the merged entity to continue its strong growth. However, OTT platforms pose a risk of shrinking the exclusive period, softening occupancies, and lower screen economics.

Besides, ICICI Securities adds that there could be roadblocks in receiving Competition Commission of India's (CCI) clearance if the merger is assessed on screen market share basis (as they have more than 50 per cent share in multiplex screen in most states) or normalised situation revenues. "But it may get de-minimus exemption from CCI approval given that Inox's turnover is less than Rs 1,000 crore," it said.