How you can arbitrage and gain in the PVR-INOX deal

PVR and INOX, the country’s top two multiplex chains, have announced an all-stock merger to create a larger player to not just take on competition from Carnival Group and Mexico’s Cinepolis but also to pool in resources against the onslaught of over-the-top (OTT) players that are fast becoming the new entertainment mode for Indian consumers.

As per the deal, INOX Leisure will merge with PVR with shareholders of INOX getting three shares of PVR for every ten shares they hold in INOX. PVR promoters, the Bijli family, will have a 10.62% stake while INOX promoters will own 16.66% in the combined entity.

The combined entity will have 10 board seats. PVR’s Ajay Bijli will be Managing Director and Sanjeev Kumar will be Executive Director at the combined firm. INOX’s Pavan Kumar Jain will be appointed as the Non-Executive Chairman while Siddharth Jain will be appointed as Non-Executive Non-Independent Director in the combined entity.

The announcement pushed shares of both the companies sharply higher in early morning trades on Monday. While they lost some shine later in the day, there are some potential gains in the offing.

INOX shareholders can smell a neat arbitrage opportunity by swapping shares of the firm with PVR at a future date. PVR shareholders see the emergence of a goliath that would not just be able to draw cost synergies but also make for better terms with movie distributors and production houses.

So how can one play the multiplex game?

As per the share swap ratio, the effective value of INOX shares in PVR is at a discount compared to the latter’s current market price. This is because if one buys say 100 INOX shares today it would cost around Rs 52,060 in total, without factoring in brokerage and taxes. These 100 shares would be swapped for 30 new shares of PVR. Given PVR’s current market price these shares would be worth around Rs 56,460.

To be sure, these shares are dynamic and fresh issue of shares by PVR may well lead to adjustment of the market price. However, the market may have already priced in some or all of those projected adjustments.

Assuming the current prices are likely to stay, there is some gain to be made by investors in INOX. The company has already seen its share price shoot up around 11% on Monday, although it has moderated from the highs of the day when it had hit the upper price band with 20% gains. PVR, too, almost hit the upper circuit with 15% gains but came down later and is currently trading with 3% gains over last week.

The two scrips will keep seeing arbitrageurs trying to make small bucks from the price movements till the deal sees a closure. The deal does face some critical challenges as it would make the combined firm too big in the movie exhibition business in the country, and the arbitrage opportunity can probably be seen as a risk premium for the transaction not seeing through or getting a conditional approval from the authorities.