Merger effect: PVR, INOX shares surge up to 20%; what lies ahead?

Shares of the country’s leading multiplex chains, PVR Cinemas and INOX Leisure, rallied up to 20% in intraday trade on Monday, in an otherwise weak broader market, following a mega merger announcement. In a surprising deal announced late on Sunday, PVR and INOX Leisure proposed a merger of their businesses to create the largest film exhibition company in India.

Buoyed by the merger deal, shares of PVR and INOX Leisure hit their respective 52-week highs on the BSE. In comparison, the BSE benchmark was trading flat with negative bias, paring opening losses.

At 12:45 pm, PVR share was quoting at ₹1,895, up 3.7% on the BSE, against previous closing price of ₹1,827.60. During the day’s trade so far, the stock price of movie theatre chain operator gained as much as 10% to touch a 52-week high of ₹2,010.35 on the BSE. The stock price has rallied 110% from its 52-week low of ₹961 on April 19, 2021. The market capitalisation of the midcap stock rose to ₹11,572.58 crore.

In a similar trend, INOX Leisure shares surged 20% to hit a fresh high of ₹563.60 apiece on the BSE. On the volume front, 4.97 lakh shares worth ₹26.76 crore changed hands over the counter as compared to two-week average volume of 1.01 stocks. The stock has delivered more than 100% return in last one year, rebounding from its 52-week low of ₹241.90 touched on April 19, 2021.

PVR and INOX Leisure in a joint statement on Sunday announced a merger to create a network of over 1,500 screens across 109 cities in India. As per the deal, the merger will be in a share swap ratio of three shares of PVR for every 10 shares of INOX, subject to their shareholder's approval, stock exchanges, SEBI, and other regulatory nods. The merged entity will be named as PVR INOX Limited with the branding of existing screens to continue as PVR and INOX.

According to a report by JM Financial Institutional Securities, this merger offers complementarity in geographies, substantial bargaining power across the value chain, and likely cost synergies. With competition now limited in the space post-merger, the new entity can further strengthen existing operations and would look to expand into newer geographies (tier 2 and 3 markets), it added.

“The merged entity would be a stronger one and could command a premium, given possibilities of synergies driving earnings upgrade. The swap ratio favours Inox shareholders slightly, using current market caps as the benchmark,” says report.

“A 15x target multiple on the combined EBITDA would yield a March 2023 target price of ₹2,300 per share for the post-merger PVR stock and ₹690 for INOX. In such a scenario, we see 47% upside on Inox and 28% upside on PVR vs Friday’s close (assuming slightly higher target multiple but not building in any merger synergies),” added the report.

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 across 109 cities.

Post the merger, the promoters of INOX will become co-promoters in the merged entity along with the existing promoters of PVR. PVR promoters will have 10.62% stake in the merged entity, while INOX promoters will hold 16.66% shares.

Ajay Bijli, the chairman of PVR, would be appointed as the managing director and Sanjeev Kumar, the joint managing director of PVR, would be given the role of the executive director. INOX’s Pavan Kumar Jain would be appointed as the non- executive chairman of the board, while Siddharth Jain would join as non-executive non-independent director in the combined entity.