PVR's acquisition of SPI Cinemas: Benefits offset high deal valuations

The Rs 6.33 billion price for a 71.7 per cent stake in SPI Cinemas enhances PVR’s pan-India presence, especially South India, where it had weak presence. Though South India accounts for half of India’s multiplex screens, it accounted for only 26 per cent of PVR’s overall portfolio. The addition of 89 (current and upcoming) screens will increase the south’s contribution to its overall portfolio to 35 per cent. What will improve it further is the plan to add 100 more screens over the next few years.

While it takes the overall screen count to 706 for PVR and prepares the company to hit the 2020 target of 1,000 screens, the valuations of the deal are on the higher side. In addition to the Rs 6.33 billion, PVR will issue equity shares for the residual 28.3 per cent. Further, PVR will take on debt of Rs 1.6 billion, taking the enterprise value of the deal at the current stock price to about Rs 10 billion.

The valuations are pegged at 16 times the enterprise value to operating profit (FY18), similar to that of PVR. Analysts say while the company has paid premium valuations for the asset, it will be earnings-accretive given the growth prospects, as well as a boost to consolidated financials. The acquisition will make PVR the number one operator in Chennai, Bengaluru and Hyderabad. Further, occupancies at 58 per cent are much higher than PVR’s 31.3 per cent.

On the financials front, operating profit margins of SPI Cinemas are expected to be in the 21-23 per cent range in FY19, which is much higher than PVR’s 18 per cent. The contribution from the advertisement segment is expected to be much higher in the consolidated entity, as SPI Cinemas’ ad revenues were largely confined to the local market while PVR could get additional revenues from national corporate advertisers.

With ticket prices expected to rise given some the de-control on prices last year in Tamil Nadu, and the increase in advertising as well as food and beverage segments, analysts expect SPI’s margins to move into the 23-25 per cent range, boosting consolidated PVR margins.

 

While PVR will take additional debt, the proceeds from the Rs 4.1 billion deal with online aggregators Bookmyshow and Paytm are timely as the company can use it to partially fund the SPI acquisition. This, coupled with receding regulatory overhang in the food and beverage business, should keep the revenue momentum strong for the company going ahead.