PVR-Inox merger: A win-win deal or last resort defensive step to drive cost efficiencies? experts decode, advise what should investors do

PVR Ltd and Inox Leisure have agreed to enter into an all-stock merger keeping in mind their shared objective. The combined entity will be named PVR Inox. As per the agreement, three shares of PVR will be equivalent to 10 shares of Inox, which is dubbed as in favour of the latter in terms of of share swap ratio.  

"Swap ratio is 3:10, 3 shares of PVR for 10 shares of Inox. Based on PVR/Inox closing price of Rs1,828/Rs470 on Friday, the merger ratio, 10 shares of Inox (10*Rs470=Rs4,700) are equivalent to 3 shares of PVR (3*Rs1828=Rs5,484), implying the ratio is favourable to Inox with 17% upside," says Jinesh Joshi, Research Analyst at Prabhudas Lilladher.  

As per the merger terms, the board will be reconstituted and will have 10 members. Both promoter families will have equal representation on Board with 2 seats each. Ajay Bijli will be appointed as the MD of joint entity, while Pavan Kumar Jain will be non-executive chairman. Sanjeev Kumar will be ED and Siddharth Jain (Non-Executive, Non-Independent director).  
Once PVR-Inox is merged, Inox’s promoters will own 16.6%, while PVR’s promoters will own 10.6% stake in the merged entity.

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"Better bargaining power"
As per Prabhudas Lilladher research analyst, the merged entity will have Invincible size advantage with 1,500+ screens as both Carnival and Cinepolis have ~400 odd screens. 

"The merger will provide better bargaining power with film distributors and both can exploit each other’s developer relationship. Most importantly, there will be no competition amongst the two to grab properties and ad-revenue bump up. They can bargain for higher yields given better reach," he added.  

'Win-win situation for both companies'

Santosh Meena, Head of Research, Swastika Investmart Ltd, too sees the devlopemnt as win-win situation for both PVR and Inox.

"The merger between Inox and PVR is a win-win situation for both companies, however, this merger needs to get final approval from CCI as it will be like a monopoly situation in multiplex space," he said.

PVR is a bigger player and it has diversified geographies that will help Inox to grow further, however, PVR has a debt issue, while Inox leisure is a cash-rich company, therefore the combined entity will have a better balance sheet, says Meena.  

"Stock prices of both companies have already rallied, hence there is a risk of profit booking on news but the long-term outlook remains bullish," he added.  

"Last resort defensive step"

Multiplex businesses is very tough business with high capex and high fixed opex, says Abhay Agarwal, Founder, and Fund Manager, Piper Serica, SEBI Registered Portfolio Management Service Provider.  
 
"Even in a fast-growing market like India, the multiplexes have been struggling to generate free cash flows. The business model in its current form is that of a glorified QSR since more than 80% of the profits come from the sale of high-priced food and beverages. The movie screening business is breakeven at best. Advertising revenues are limited to local area advertisers and some standard government ads. Footfalls are completely dependent on the quality of new releases, and the multiplexes have no control over that. Most importantly, they have been losing out to international OTT behemoths in terms of the release of new content," says Abhay Agarwal.  
This merger of PVR and INOX should be seen as a last resort defensive step to drive cost efficiencies, he says, pointing out that It would also give them some might to push the studios to go in for theatre releases.  

Dauting task ahead of PVR, Inox

However, it would be interesting to see how the merged entity creates a compatible culture, says Agarwal.  

"For instance, INOX follows a strict vegetarian menu. While these are operational details that would get worked out, the merged entity would now pray that viewers throng the theatres in large numbers so that average occupancy increases beyond 35% and then pay for the F & B to make the business model work," says Piper Serica Fund Manager.  
 
As per Agarwal, any kind of surprise M&A activity, especially by consumer brands, is typically immediately cheered by the market participants and there is a spike in buying interest. However, in this case, we believe that the merged entity will have to work hard to repair its balance sheet and convince the lenders that it can generate enough free cash flows to sustain the debt taken during covid lockdowns, he says.  

What should investors do?  

"Our expectation is that during the period that the merger takes effect and for a year thereafter, the market valuation will stay in a narrow range. Those who believe that the merged entity will create a strong business can buy the shares for the long term. However, the short-term traders looking for a quick upside may be disappointed," he added
Meanwhile, brokerage house CLSA retained 'buy' rating on PVR and Inox stating the merger offers compelling synergy.  

JM Financials too was bullish on the multiplex stocks after the merger news and sees an upside of up to 47% in the two stocks on March 25 closing prices.  

On Monday, both PVR and Inox Shares hit fresh 52-week highs on back of merger news and closed at Rs 1883.75 per share and Rs 525.50 per share on the BSE respctively.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)