PVR To Merge With Cinepolis: What To Expect?
PVR may announce a merger with Cinepolis India, which is the third-largest pan India multiplex chain with approx. 380 screens. This will enable the combined entity to have a screen share of 42% within the multiplex segment and a screen share of 15% in the overall India screen ecosystem. The combined entity will command a Box Office (Hindi and English) revenue share of ~35% post the merger
Impact analysis
Overall win-win proposition
The merger will enable three key triggers in our view 1) bigger market share in the multiplex ecosystem, which may lead to duopoly (PVR/Cinepolis and Inox to command ~50% Box Office revenue share together) 2) synergies on advertising/convenience fee which has a big positive impact on EBITDA 3) broad-based presence in India (Cinepolis has a higher exposure in non-metro cities). A coordinated go to market strategy will ensure rapid expansion and may increase competitive intensity for INOL which has an ~17% share in Box Office revenue (almost half than that of this combined entity). PVR will also be able to leverage Cinepolis’ cost-efficient strategy as the latter commands the highest EBITDA margin in the Indian multiplex segment
Long term challenges – uncertainty over management control and cultural challenges
There is still no clarity in terms of who will retain control of this combined entity over the longer term; we believe it will be a big advantage if PVR retains the control, as only then they will be able to make the most of the synergies around ad/convenience revenue. Further, in our view, PVR also shares a much stronger relationship with key mall developers, as it has a huge first-mover advantage on key strategic locations which is largely irreplaceable. We also cannot rule out cultural and integration issues as PVR is more aggressive vs peers on softer aspects like 1) expansion 2) marketing and other costs; this may create challenges over the long term as Cinepolis India has been rather conservative
Fair valuation for Cinepolis India; deal may be slightly EPS accretive
As per media reports, Cinepolis will hold a stake of 20% stake in the merged co; Basis above, we believe Cinepolis India may be valued at an EV per screen of INR 90mn, which is a 25% discount vs PVR; we believe this valuation is fair given the kind of scale Cinepolis operates; the entity also has healthy profitability vs peers. Synergies on ad, convenience fee and rentals will ensure better profitability; however, due to the share swap, there is a big dilution for PVR, which will mean that the deal will be mild EPS accretive for PVR
View and valuation
We expect a strong recovery in FY23 helped by a backlog of large content slated to release in cinemas, which will help breach pre-COVID Box Office revenue for exhibitors. We may see the combined entity of PVR/Cinepolis opting for more acquisitions in the future in order to become larger in size or INOL may resort to buying some smaller multiplex chains in order to compete with this large entity, We maintain our view that consolidation is a positive for the larger listed chains, as it further strengthens their dependence on the content ecosystem/Box Office. We maintain our BUY rating on PVR with a TP of INR 2,575 based on 14x one-year fwd. EV/EBITDA. Await more details on the strategy going ahead and the clarity on management control, but overall we believe this will be mild EPS accretive despite the dilution (~35% share dilution) due to fresh issue; the EPS accretion is primarily due to 1) consolidation (35% positive impact on EBITDA) and 2) synergies (10-15% positive impact on EBITDA)
What works in favour - key triggers due to the deal
-Commanding position in the film business, as Box Office market share moves closer to 35%-37%; this will ensure high dependence by producers and will enhance bargaining power on distributor share over medium to long term
-Synergies on ad. revenue which will ensure better go to market; will enhance ad. revenue as PVR has seen best execution on advertising revenue vs peers, which in turn will enhance profitability
-Broad based entity – PVR has a big edge in North, SPI has a competitive advantage in south and Cinepolis portfolio will add to the pan India presence for PVR/Cinepolis
-Synergies on convenience fee and MG (minimum guarantee) related revenues; combined entity will trigger higher MG from aggregators (PayTm, Bookmyshow), which will enhance profitability
-Advantage on economies of scale on F&B, which may lead to better profitability vs peers
-Management control retained in favour of PVR which will ensure a smooth transition; PVR has had the first mover advantage in multiple aspects (premiumisation, higher convenience fee, higher ad revenue per screen)
-MNC backed promoter group may lead to minor re-rating of multiples; the advantage of global insights and exchange of synergies from the parent company
What may work against - key risks in the deal
-Cinepolis has had a higher EBITDA margin than that of PVR despite lower ad/convenience revenue, driven by strict cost control measures, as compared to PVR which generally has been aggressive on cost front; this may lead to cultural challenges for the combined entity
-Since its existence, Cinepolis has lagged its peers in terms of organic screen addition, this may mean that there may not be a high incremental screen addition impact on PVR due to this merger
-Cinepolis India has been a zero debt company since its inception; the cinema business is capital intensive and may require debt funding for healthy expansion plans; no debt policy may limit new screen growth prospects
-In case of the control moving away from PVR to Cinepolis, there may be challenges for coordination with the parent company for the combined entity, which will impact the pace of overall strategy execution
-Cinema business is largely led by two things 1) location of the mall and 2) brand recall; in the case of Cinepolis taking control, relationship with mall developers may see a negative impact due to change in management
