Multiplexes : Together to win – ICICI Securities

A tectonic shift is taking place in the multiplex industry with the top 2 operators (PVR and INOX) deciding to merge their operations. The merged company would be financially strong and can grow faster than possible individually. It would help them tap growth even from smaller markets (Tier 2 and below). Merger will also help fight the OTT penetration by creating strong cinema experience and cost-saving from a larger combined operation. We like the merger announcement, which has balanced valuations and execution. Mr. Ajay Bijli is credited with creating the best multiplex business in India and expanding it to F&B and allied businesses unlike global peers. Strong cinema performance in Mar’22 should recede the fear of OTT disruption. Also, big-budget movies, which justify cinema spend (as in Hollywood) is playing out in India too. We remain constructive on the multiplex sector. Key to watch: 1) possibility of a fresh covid wave hitting India and causing another temporary disruption; and 2) CCI observation, if any, on the merger.

PVR-INOX to merge operations. Multiplex industry is set to completely change course with the announcement of merger of the top 2 operators (PVR and INOX). This comes against expectations of record footfalls in Mar’22. Both the companies, in their respective Board meetings, have approved an all-stock amalgamation. INOX will merge into PVR with the stock swap ratio at ‘every 10 shares of INOX will get 3 shares in PVR’. The deal values INOX at 17% premium to Friday’s (25th Mar’22) closing price. The premium we believe is for stronger balance sheet (free of net debt), real estate assets and PVR promoters retaining operational control over the proposed merged company despite lower equity stake, while INOX promoters will be represented only at the Board level.

The Board will comprise 10 members with both families having two members each. Mr. Pavan Jain has been appointed non-executive chairman of the merged company while Mr. Ajay Bijli will be the managing director.

Post-merger, PVR promoters will have 10.62% equity stake while INOX promoters will have 16.66% – thus the promoters together will represent 27.28%. Both the promoters have the right to increase their stake in the merged entity (INOX promoters have expressed their interest to do so). Also, there will be no lock-in period for the promoters.

CCI approval or notification not required. Due to the covid situation, government has waived CCI approval for merger of entities with less than Rs10bn in revenues. PVR and INOX revenues have been depressed owing to covid impact, hence the said merger does not require CCI approval. However, CCI has the right to raise queries and, if it does so, the company/ies will have to respond appropriately. Hence, CCI view on the merger is the only possible hurdle we see.

Synergy benefits: Though the two managements remain optimistic, we expect limited gains. PVR and INOX have spoken of synergy benefits on both revenue and cost sides. INOX management said ad revenues would benefit from large footfalls for the merged company while SPH and convenience fees, being more location-specific, are unlikely to see much gains. Landlords have been more than generous on rental waivers during covid and we don’t expect any renegotiation on the same. Properties are already signed for ~2,000-screen expansion by PVR and INOX, which they said would not disturb the existing agreements. Bargaining on producers’ share again looks unlikely as quality of content availability is key for running the multiplex business. Further, both PVR and INOX don’t see much employee redundancy as, we believe, the companies have already gone very lean in the wake of covid.

Strong screen expansion plans for next 5-7 years. The merged entities will have 341 cinemas with 1,546 screens spread over 109 unique cities. Both the companies have very strong screen pipeline with each having agreed to add ~1,000 screens (total ~2,000 screens) over next 5-7 years. Immediate screen openings will be higher due to large properties being delivered with PVR alone planning 120-130 openings, and INOX around a hundred. 10-15% of the new screens will be in premium category. The merged entity would aim to expand its presence in tiers-2/3/4 cities in the coming years. ICICI Securities