An Indian Civilizational Perspective

PVR to acquire Cinemax properties: What does it mean for Film Releases and Investors?

PVR Ltd. is acquiring 95.27% stake in Cinemax India.  Cinemax chain of multiplexes, are owned by the Kanakia Group, and operates 138 screens in 39 locations across the country.  PVR, on the other hand, owns 158 screens with 36 properties across 20 key cities.  Together they will become the largest “Movie Exhibition Chain” in the country.

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Together PVR and Cinemax have 85 properties, which will now be with PVR.

Also, this month (November 2012), PVR had  launched its first 8 screen IMAX location at Kurla in Mumbai along with two properties in Bangalore.  The company had plans to open cinemas in Tier II and III cities, like Nanded in Gujarat to penetrate small towns and improve accountability for ticket sales, which will be computerized.

The Deal

This deal – worth Rs 542 crores, has two parts – one, buying the stake of Cinemax and two buying the additional 26% share from public shareholders through open offer.  Two other companies – INOX and Cinepolis – were also in the race, but they lost out to PVR.

According to the agreement, PVR’s wholly-owned subsidiary Cine Hospitality would acquire 69.27 per cent stake owned by the promoter group of Cinemax at a price of Rs 203.65 for an all cash consideration of Rs 395 crore. As per SEBI rules, this will be followed by an open offer for an additional 26 per cent (up to 72.80 lakh equity shares) at Rs 203.65 per share, taking the total deal size to about Rs 543 crore.  PVR is also raising Rs 260 crore through a preferential issue of equity shares to its promoters, existing investor, L Capital and new private equity investor, Multiples Alternate Asset Management (MAAM).

Impact on Releases

The impact on this deal on the releases can be seen on how the agreement between PVR and Yash Raj Films had boosted the business for Jab Tak Hai Jaaan.

 Recently, apart from being the two Diwali releases this year, Jab Tak Hai Jaan (JTHJ) and Son Of Sardaar(SOS) were in the news for another reason. JTHJ was assigned a larger number of screens than SOS was, due to a pact between Yash Raj Films. According to this deal, the studio had told exhibitors that if they wanted to screen this year’s Eid release, Ek Tha Tiger, they would also have to take JTHJ.

What it means is that large production houses will rule the roost since they can dictate the quid pro quo deals with companies like PVR for their multiple releases.

How is it for the investors?

For the investors too, it seems like a good deal.  It may not be paying in the short term, but from the long term perspective, when the financial burden of the purchase is offset, the deal will be more paying to the company.

ET Now: Just a word really on this deal as well and we are starting of with midcaps as the day belongs truly and fairly to the large caps but it has been going for a while, finally PVR acquiring Cinemax?

P Phani Sekhar: It is a very interesting deal and although I am not completely convinced of the financial aspects of it. PVR gets very good bouquet of properties from Cinemax stable. So from a business point of view, it is an excellent deal for PVR because it now becomes no. 1 multiplex operator.

From Cinemax shareholders’ point of view, it is a good deal because the price is good and purely if you were to analyse the way Cinemax was performing, the shareholder could not have expected anything better, but I am not so convinced about the deal for PVR shareholders at least in the near to medium because the financial burden of this deal might at least for the next two to three years completely offset any business synergies that might (4:27). However, from a long term point of view, it seems to be good deal but long term is real long term in this case.

ET Now: Right but the stock of PVR while your point is well taken and perhaps that is why we are seeing some nervousness in the PVR stock but over the last three months it is up almost 30%. Do you think that market has discounted to a large bit on the kind of leadership that this gives PVR?

P Phani Sekhar: I do not think so because when deals of this size generally happen and although in absolute terms it might not be a very large deal but in relative terms compare to the size in the industry, it was a large deal. I am not so sure if the market, if you look at the previous experience has been successful in predicting what kind of financial impact it will have on the acquire so to that extent I will not be so sanguine in my assessment that the market would have already discounted the deal and to that extend the downside is limited.

I guess the real test will come in the next two to three quarters when after merger PVR starts reporting consolidated numbers and that is when a lot of questions will be asked but more importantly we also do not know the structuring of the deal because a lot of that will determine how successful this deal is. If it is funded a lot through debt, then there will be lot of problems but if there is some smart structuring through equity, then I guess the problems will be a lot less.

What do you think of the deal?

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