The announcement of a merger between PVR and Inox Leisure, made last year, has moved one step closer to becoming a reality.

Today is the record date in the merger process whereby the shareholders of Inox Leisure as on this day (February 17, 2023) will receive three shares of PVR (currently trading at ₹1,708) for every ten shares of Inox Leisure (₹507.1). PVR will issue 36.7 million PVR shares to Inox shareholders, which implies an increase in outstanding shares by 1.59 times for PVR.. Inox shareholders are likely to get PVR shares in five days, as per company.

Dilution and exchange ratio aside, long-term shareholders of the merged entity should consider the short- and long-term implications of the merger to stay invested in the stock.

Short-term implications

PVR had acquired few smaller chains earlier (most recently SPI Cinemas in 2018), but consolidating an equally big national exhibitor would be a challenge to the combined entity’s management team. Post transaction, the existing branding would continue for the two and future screens would bear the branding of PVR-Inox as per the company.

The primary challenge is related to the difference in operating metrics of the two companies. PVR average ticket price and spending per head is at 6/25 per cent premium to Inox (as per Q3 FY23 results).

This could be attributed to the location premium between the two operators where PVR operates in slightly premium locations. The two entities, which are only now witnessing a y-o-y growth in realisations (ticket and spending) would again be lowered in the combined financials for PVR shareholders.

Similarly, PVR reported an occupancy of 29 per cent in Q3 FY23 compared to 23 per cent for Inox. The combined entity must post more than 30 per cent occupancy to generate meaningful cash flows.

Long-term synergies

PVR had 903 screens as on January 19, 2023 and Inox had 752 screens at the end of FY23, making for a combined 1,655 screens.

Besides cost overheads, economies of scale and savings, the combined entity, which will account for close to a half of the India’s multiplex screens, will have better bargaining position with respect to rentals and cinema distributors.

The combined entity will be the leading option for upcoming mall developers, who should be willing to give anchor tenant status to PVR-Inox driving better terms on rentals.

As PVR-Inox presents a one stop shop for wide distribution across the country, English, Hindi and even regional cinema distributors would be willing to lower the receipts from movie exhibition (38-50 per cent of gross box office) by 100-200 basis points at least.

Better F&B offerings across entities, scope for higher occupancy, ability to draw advertising income with high cost savings are the low hanging fruits for the combined entity. .

Not withstanding teething troubles and slow growth in earnings during the merger, the long-term benefits of the merger far outweigh its short-term implications.

We reiterate our buy call on PVR which is made on the assumption of merger synergies playing out in the long-term..

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