BackMerger with PVR takes Inox Leisure’s shares above pre-covid highs
The merger comes at a time when the fear of contracting the coronavirus is receding now and demand for movie-watching is likely to see a strong rebound hereon, unless, of course, there are fresh curbs driven by a serious spread of covid-19 again.
PremiumShares of PVR Ltd and Inox Leisure Ltd jumped in Monday’s morning trade on NSE. This is after both companies announced a merger on Sunday. Inox’s shares rose about 13% to Rs531 apiece, surpassing their pre-covid highs of Rs495 per share seen on 24 February 2020. In comparison, PVR’s shares rose by around 8% and are marginally lower than their pre-covid highs.
Inox’s shareholders will receive three shares in PVR for ten shares of Inox. "Based on the swap ratio, Inox is valued at 17 times EV/Ebitda and EV/screen of Rs9 crore, which is 15% higher than its current price (based on Friday’s price), but 18% below PVR’s valuation on a FY20 basis," said analysts from Motilal Oswal Financial Services in a report on 28 March. EV is short for enterprise value. Ebitda is earnings before interest, tax, depreciation and amortization.
The merger comes at a time when the fear of contracting the coronavirus is receding now and demand for movie-watching is likely to see a strong rebound hereon, unless, of course, there are fresh curbs driven by a serious spread of covid-19 again. Recall that both companies have suffered massive losses in the past two fiscals as the multiplex sector was amongst the worst hit owing to the enforcement of strict restrictions during the pandemic.
Together, the companies will create a behemoth, operating a total of 1546 screens across 341 properties. What is more, with the scale of operations being small in FY21, the merger may not require the approval from Competition Commission of India (CCI). “The timing of the deal is smart as CCI approval (which would have been difficult in a normal year) is required only for companies with a revenue threshold of Rs1000 crore or more in the last completed financial year," said an analyst requesting anonymity. Note that in FY21, PVR’s and Inox’s consolidated revenue from operations were Rs280 crore and Rs106 crore, respectively.
What are the synergies from this merger?
The merged company, PVR Inox Ltd, would command over 40% market share in terms of box office revenue. One of the near-term benefits would be on ad revenue and convenience fee. “Inox’s ad revenue per screen is at a 33% discount versus that of PVR as on FY20; we believe 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 medium term," said a report by Elara Securities (India). The brokerage further added, “In terms of convenience fee too, Inox derives a much lower convenience fee per screen (50% lower than PVR on a per screen basis), which too will be revised upwards. We believe there is a synergy benefit of Rs150 crore on Ebitda of Inox due to above two metrics (about Rs90 crore/60 crore benefit on ad/convenience fee respectively)." Even so, synergies on other parameters such as spend per head and average ticket prices is expected to be derived from a medium-to-long term perspective.
To be sure, analysts reckon both companies would have done well individually too, without the merger. “Given the sizeable scale of Inox in the recent past, we believe it could have bridged this gap even without the merger. PVR too, after multiple rounds of capital raising in the last couple of years, may be able to leverage the balance sheet to drive screen additions," said Motilal Oswal’s analysts.
“I think they want to enhance negotiating power versus OTT (over the top) players," says another analyst, requesting anonymity. While announcing the merger, PVR said, “Creating scale to achieve efficiencies is critical for the long-term survival of the business and fight the onslaught of digital OTT platforms."
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