CNBC TV18, August 26, 2022
A proposed merger between PVR and Inox Leisure to create the country’s largest multiplex chain has hit a roadblock. The Consumer Unity and Trust Society (CUTS), a non-profit group, last month sought a probe into the proposed combine by the Competition Commission of India (CCI), the country’s fair trade regulator.
The complaint by CUTS, filed on July 27, alleges that the PVR-Inox agreement would not have qualified for an exemption from the necessary merger review by the regulator if it weren’t for COVID-19 lockdowns. The group waits to hear from the CCI.
The two companies’ boards — the country’s largest multiplex chain operators — approved an all-stock merger to create a film exhibition entity with a network of more than 1,500 screens.
But the proposed marriage has left investors with a slew of questions:
What would it mean for investors?
Will the monopoly result in a hike in prices?
Will the box office become more advertisement-oriented?
What’s in it for investors?
The share-swap ratio in the merger stands at three shares of PVR for 10 shares of Inox — which means investors will get three shares of PVR for every 10 INOX shares held.
Based on the ratio, Inox is valued at 17 times the enterprise value-to-EBITDA ratio — a key measure of a business’s overall financial performance — and EV-to-screen value of Rs 9 crore, which is 15 percent higher than its current price but 18 percent below PVR’s valuation basis the year ended March 2020, according to Motilal Oswal Financial Services.
Despite the strong outlook for the merged entity, the brokerage has a ‘neutral’ rating on the stock, citing historically rich valuations.
In March, Motilal Oswal set the target price for PVR at Rs 1,600, estimating a 12 percent downside from Rs 1,883, the closing price on March 25.
Prabhudas Lilladher has a ‘buy’ call each on PVR and Inox Leisure with target prices of Rs 2,224 (18 percent upside) and Rs 667 (27 percent), respectively.
Nirmal Bang has also continued with ‘buy’ calls on both and with target prices of Rs 2,383 and Rs 594, implying upside potential of 30 percent and 26 percent, respectively.
“The upside could be larger as we believe valuation multiples could expand beyond what we have baked in. We are looking at an entity which can deliver Rs 1,800 crore in EBITDA by FY24 if there are no hiccups,” Nirmal Bang said in a report.
As of Wednesday, PVR shares have risen 0.1 percent since the announcement. Inox Leisure has risen 8.5 percent in this period.
Will it be a win-win situation for entertainment, entertainment and entertainment?
“The merger will result in opening up more avenues to source movies, open more screens and reach audiences in Tier 1 and Tier 2 cities,” said Vishal Agarwal, a freelance film critic who has been in the industry for the past six years.
With PVR currently operating 871 screens across 181 properties in 73 cities and INOX operating 675 screens across 160 properties in 72 cities, the combined entity will become the largest film exhibition company in India, operating 1,546 screens across 341 properties in 109 cities.
According to a statement by PVR, the short-term plan will be to scale up the number of screens by 200 every year since the inception of the combined entity.
“We can see that as both the major multiplex entities will come and become one, so it will be increasing investment, the producers will be moving towards better quality content,” added Agarwal.
What about PVR and Inox?
While PVR’s ad revenue per screen stood 35 percent higher than Inox Leisure’s in the year ended March 2020, the gap has narrowed over the last two years.
Analysts estimate that the merger is likely to create a monopoly in advertising.
According to Nirmal Bang, the merged entity has the best locations in all major urban centres in India and can drive higher ad rates.
“On the ad side, prices can rise. With the merger, PVR can help INOX with advertisers and scale their ad revenue. With the merger, the gap in ad revenue can narrow further as combined entities can bargain for higher yields given better reach,” said Jinesh Joshi, Research Analyst at Prabhudas Lilladher.
What about competition?
The merger will give the PVR-Inox combine a size advantage with a pan-India network of more than 1,500 screens. PVR currently has 871 screens and Inox 675 screens.
Prabhudas Lilladher believes the merger will relegate competition to the backyard as Carnival and Cinepolis have 400 screens each.
“Now that PVR-Inox is planning to come in Tier 2 and Tier 3 cities, there might be a chance that it will affect my business in terms of audience and ad, but I also think they might ask single-screen owners for rental space and build new theatres there,” said a single-screen theatre owner from Jhansi, Uttar Pradesh, on the condition of anonymity.
Can you expect big moves in the prices of popcorn and tickets?
Analysts believe the price hikes cannot be estimated given the existing screens will not change their brand names after the merger.
Consolidation can happen as two separate entities will operate as a single one, said Joshi.
“For instance, if PVR sources from X type of a vendor and Inox from another vendor, then they can source from one vendor, reduce competition and get discounts but it won’t impact the price,” Joshi added.
Anand Jain, a film distributor, pointed out that the prices of tickets, as well as the food and beverage products, will depend on demographics and movies.
“We see different prices for PVR shows in different cities… Even the prices of F&B items differ because they depend on the location of the multiplex, state rules and the people of the area… Despite the merger, the pricing decisions will be internal depending on the location and other factors,” said Jain.
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