The shares of multiplex chains PVR Ltd and Inox Leisure hit new highs on Monday on merger proposals. The respective board of directors of two companies have approved an all stock amalgamation of Inox with PVR. According to the terms of the deal, the shareholders of Inox will get three shares of PVR for every 10 shares held in the company.

“Based on the swap ratio, Inox is valued at 17x EV/EBITDA and EV/screen of ₹9 crore, which is 15 per cent higher than its current price, but 18 per cent below PVR’s valuation on a FY20 basis,” Motilal Oswal Research said on the merger proposal.

PVR shares on Monday opened at a fresh 52-week high of ₹2,010.35 on the BSE in comparison to the previous close of ₹1,827.60.

It closed at ₹1,886.00, up ₹64.35 or 3.53 per cent.

Similarly, Inox Leisure opened at a fresh 52-week high of ₹563.60 against the previous close of ₹469.70 on the BSE. It closed at ₹522.90, up ₹53.20 or 11.33 per cent. It closed at ₹524.90 on the NSE, up ₹55.20 or 11.75 per cent.

Santosh Meena, Head of Research, Swastika Investmart Ltd said, “The merger between Inox and PVR is a win-win situation for both companies. However the deal needs to get a clearance from the Competition Commission of India as it involves two dominant players in the market.”

On the opportunities for both the companies, Meena said that PVR’s diversified geographies will help Inox to grow further. On the other hand, PVR has a debt issue, while Inox is a cash-rich company. This will help the combined entity have a better balance sheet.

“Stock prices of both companies have already rallied therefore there is a risk of profit booking on the news but the long-term outlook is bullish,” Meena added.

Bigger entity

According to Motilal Oswal Research, the management highlighted two key points: “The merger will offer compelling revenue and cost synergies as seen from Inox’s lower share of non-ticketing revenue at 42 per cent versus 48 per cent for PVR. This will allow it to leverage the scale of the merged entity.”

On other costs such as rentals, the management said the monopolistic nature of the market had resulted in a favourable environment for multiplex operators, the report said.

Impact of OTT platforms

The management also acknowledged the threat of OTT platforms.

“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,” the report said. 

“The rich valuation it commanded historically was led by strong growth. The screen addition opportunity does provide the ability to continue its strong growth. However, OTT platforms pose a risk of shrinking the exclusive period, softening occupancies, and lower screen economics,” it said.

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