A proposed merger with the cinema operations of Israeli entertainments group Cinema City International (CCI:WAR) provides important market scale for Cineworld (CINE). It will make the £650 million cap Europe’s second biggest cinema chain and give it a strong position in fast-growing emerging EU markets. Analysts reckon the targeted £2 million in annual synergies could be materially exceeded.

Even after a good run following the announcement of the deal (10 Jan) we still see plenty of upside from the 433.6p mark at Cineworld, a running Play of the Week (see Plays Shares, 14 Nov ‘13). The business combination will be earnings accretive, boost dividend cover and provide important geographical diversification.

Cinema City has operations in seven countries including Czech Republic and Hungary. In Poland, where the target has most screens, it has double the number of people living near its cinemas compared to Cineworld in the UK, so the acquirer believes it could improve visitor numbers and frequency by rolling out more sites.

The cost of building a new cinema in Europe, on a per screen basis, is half that of the UK, claims Numis, adding: ‘Cinema City can get very good real estate deals as cinemas are most important to shopping mall developers (cinemas drive footfall).’

Investors will get a chance to buy discounted shares as Cineworld is planning a £110 million, eight-for-25 rights issue. It is buying Cinema City for an enterprise value of £503 million.

Analysts are bullish about the business combination benefits and we share their enthusiasm.