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PVR-Inox merger – How are the cards stacked?

Deal contours – equal footing

PVR and Inox, the two major Multiplex players, announced a merger. The share swap ratio stands at three shares of PVR for 10 shares of Inox. Based on the swap ratio, Inox is valued at 17x EV/EBITDA and EV/screen of INR90m, which is 15% higher than its current price, but 18% below PVR’s valuation on a FY20 basis. Both promoter groups – PVR and Inox – will hold two board seats in a reconstituted 10 member board, with PVR represented by Mr. Ajay Bijli and Mr. Sanjeev Kumar as MD and ED, while Inox will be represented by Mr. Pavan Kumar and Mr. Siddharth Jain as Non-executive Chairman and Non-executive Director, respectively. The existing properties will continue to use their respective brands, but the new screens will be branded as PVR Inox. CCI approval is likely given the lower nature of operations in FY21. However, PVR’s past acquisition called for divestments even on a regional basis where it held dominance.

Opportunity in the Multiplex market

In the last five years, the Cinema industry has seen a decline in the number of screens. Around 70% of the market consist of single screen Cinemas, which are facing a shutdown, whereas multiplexes, with 30% share and ~2,700 screens, are seeing strong growth. Given the large movie market (over 2,000), healthy box office collections, lower number of screens/cinemas, and a concentrated multiplex market (PVR/Inox command over 40% market share), the Multiplex market has healthy room to add new screens. The combined entity plans to deepen their network in Tier II and III markets.

Rationale for the merger

The management highlighted two key points: a) The merger will offer compelling revenue and cost synergies as seen from Inox’s lower share of non-ticketing revenue at 42% v/s 48% for PVR. This will allow it to leverage the scale of the merged entity. But 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. On other costs like rentals, the management said the monopolistic nature of the market had resulted in a favorable environment for multiplex operators. b) Historically, the management has been dismissive of the threat posed by OTT platforms. However, for the first time, it acknowledged the threat and the need to create scale to fight the onslaught. The timing of the deal was unclear considering the recovery in the Cinema industry and the strong pipeline of movies, including recent feedback on box office revenue. Despite the huge opportunity for growth in screen additions, the management acknowledged the threat posed by OTT platforms to occupancies and screen level profitability metrics.

Valuation

We value PVR at 12x FY24 EBITDA to arrive at our TP of INR1,600. We maintain our Neutral rating. 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.

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