Wednesday, January 14, 2015

PVR to buy Chennai's Sathyam Cinemas for Rs 750-1000 cr

(SPIruns a cinema exhibition, distribution and production business but are known for their portfolio of some of the most iconic cinema destinations.)

The Ajay Bijli led PVR group seems set to acquire Chennai's premier movie exhibition company SPI Cinemas, popularly known as Sathyam Cinemas, in what could end up to be the biggest deal in Bijli's career as well for India's multiplex sector. Multiple sources aware of the on-going discussions said save last-minute developments, the deal may close for a rather steep valuation of approximately Rs 750-1,000 crore for just 40 odd screens, located predominantly in the Southern metro. To put this in perspective, last month Carnival Cinemas paid a little over Rs 700 crore to buy out Anil Ambani's Big Cinemas that has 242 screens across the country.

This also underscores the growing consolidation frenzy that has gripped the multiplex industry in recent times - with 5 deals in 12 months, valued at over Rs 1600 crore --- as theatre operators seek to improve their bargaining power with film studios and distribution companies to gain a bigger share of box office receipts. Additionally, with a prolonged slowdown in commercial real estate (read malls that typically anchors these multiplexes), dominant players feel inorganic growth is faster than time consuming greenfield developments.

The SPI Group currently runs a cinema exhibition, distribution and production business but are known for their portfolio of some of the most iconic cinema destinations across South India. According to the company's website, it currently operate close to 40 screens under 5 categories -- Sathyam, Escape, thecinema, Luxe, their uber premium offering and S2 Cinemas and are poised to open over 50 screens by early 2015. PVR, with 454 screens in 102 locations across 43 cities, is the largest cinema exhibitor in the country today.

Ajay Bijli, Chairman & Managing Director, PVR Ltd did not respond to ET's email query. Attempts to reach him or his top management on their mobiles also did not yield any result. A company spokesperson declined to comment on market speculation.

"We are exploring several options to raise capital and are also in talks with several PE players. We have not taken any final call on the future course of action. A sale is an option but at this moment I have nothing to comment about on any valuations or potential discussions as nothing has firmed up yet," Kiran Reddy, Chief Executive Officer of SPI Group told ET. Sources add that they have been in the market for almost a year now and have been sought after by most of their peers. While most discussions fell through with the Reddy's insistence on a significant valuation premium, PVR has pursuing the opportunity for months now. PWC and EY are believed to be advisors in the deal.

Earlier in December, newspaper reports had said that the two sides were in negotiations

What makes SPI Cinemas such a prized catch despite a small portfolio of just 40 odd screens that are largely concentrated in just 1 city - Chennai. For one, it is amongst the most profitable operators today with one of the highest average occupancy - over 65% -- anywhere in the country. It draws over 3 million customers a year. One of the sources mentioned above said the Reddy family owned chain is expected to post an Rs 85-88 crore EBITDA by the end of this financial year. Recent multiplex transactions in India have been sealed at 10-12 times EBITDA multiples, almost double that of global averages. As per data available from the registrar of companies, in FY 14, SPI Cinemas posted around Rs 39 crore of EBITDA on revenues of Rs 189.4 crore. The company had Rs 186 crore of debt then.
With legacy real estate in their possession, most are expecting some of the prime properties of SPI Cinemas to also be included in the deal. It also gives PVR a very strong footing in the movie crazed Chennai market - home to some of the biggest movie stars from Kollywood. "It is a perfect, high impact buy for PVR. It gives them access into a movie crazy city which sees an average occupancy of 65-70%, while Sathyam sees an occupancy of close to 85%. This is because the Reddys' have not only built a class complex, they run it very efficiently," said a local exhibitor from Chennai.

Smart yet reticent, the Reddy's never thought of cinemas as their core business interest and in fact in the early 80's had even thought of demolishing their 1st three-screen movie theatre to pursue the core real estate ventures. But riding on the multiplex mania, they transformed their dowdy company into one of the most premier exhibition companies in Asia with several cutting edge technological breakthroughs and frills that include touch screens to order tickets, monster Macs to browse, a spa, lavish F&B and gaming zones and a new luxury lounge. "A decade ago, even with just 8-9 screens, they had the foresight to hire a foreign CEO to focus on operations and profitability," added the official from Chennai.

But retaining pricing power at a time when the sector is on the throes of massive shakeout - the top two national players PVR and Inox control 50% of the total 1600 multiplex screens in the country - was becoming difficult. These national rivals along with global players like Cinepolis with deeper pockets were also chipping into SPI's bastion in Chennai.

For PVR too, inorganic growth works the best for a market like Tamil Nadu which has a cap on Rs 120 on ticket prices. "Inorganic route to expansion in areas where a chain is not present can be a very efficient strategy in a theatrical distribution business. While premiums will need to be paid for central locations, permissions obtained and ready infrastructure, it can still prove to be a better expansion strategy as compared to going greenfield. Further, one also eliminates an existing competitor from the landscape," said Smita Jha, Leader- Entertainment & Media, PricewaterhouseCoopers.
Some however do feel that PVR was left with no choice having lost out earlier on the Big Cinemas deal to Carnival. Last July, the number 2 player Inox scooped up Delhi-based Satyam Cineplexes for Rs 182 crore thereby expanding its presence to 50 cities, with 91 multiplexes and 358 screens. Having missed a few chances in the past, PVR's last acquisition was in November 2012, when it had bought out the promoters of Mumbai-headquartered Cinemax for Rs 395 crore.

It however remains the most aggressive player opening 33 screens in the first half of this fiscal and expects to open 65-70 more during the rest of the fiscal. According to a November research report by Standard Chartered Securities, PVR has taken an enabling resolution to raise Rs 500 crore in equity to fund inorganic growth opportunities. However the same note cautioned "While not averse to an inorganic growth strategy, we believe any irrational acquisition will lead to a significant de-rating of PVR." For FY 2014, on a consolidated basis PVR reported revenues of Rs 1358.8 crore, EBITDA of Rs 226.2 crore & PAT of Rs 50.39 crore.

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