PVR pays stiff price to climb to No.1 slot
Nov 30, 2012 (Menafn - Mint - McClatchy-Tribune Information Services via COMTEX) --Keep your eyes wide open before marriage, half shut afterwards, goes a popular saying.
Is PVR Ltd shutting its eyes before its marriage with Cinemax India Ltd? The hefty premium it is paying to acquire the exhibitor seems to suggest that. PVR's gambit may be to keep other rivals at bay and use economies of scale to make the deal work.
PVR announced on Thursday that it shall purchase a 69.27% stake from Cinemax's promoters at Rs.203.65 per share for Rs.395 crore. That works out to a premium of only 11% to Cinemax's price but is handsome nevertheless, especially since Cinemax has gained a whopping 219% since 18 October, the day it was listed again after a separation from its real-estate division. Although Cinemax's September-quarter results were strong, rumours of a stake sale contributed to the steep run-up.
The valuation of Rs.203.65 per share is a sizeable premium to Cinemax's closing price of Rs.58 on the day of its listing last month. Cinemax does appear expensive relative to PVR. At the offer price, Cinemax trades at 16.2 times its estimated earnings for fiscal 2014, brokerage ICICI Securities Ltd estimates, while PVR trades at 11.4 times. On enterprise value to seat ratio, Cinemax's valuation is higher at Rs.203.65 and works out to Rs.1.95 lakh, compared with Rs.1.67 lakh for PVR. Enterprise value is market capitalization plus net debt.
This valuation is despite the fact that PVR's financial health is better than Cinemax.
On 30 September, PVR's consolidated debt to equity ratio stood at 0.62 times, compared with Cinemax's 0.7 times. A debt to equity ratio below 1 is good.
Moreover, PVR had cash and equivalents worth Rs.72 crore at the end of the last quarter, compared with Rs.7.56 crore of Cinemax.
PVR's revenues, too, are higher than Cinemax in the six months ending September. Further, PVR operates 213 screens, earning an average ticket price of Rs.167 in the September quarter, compared with Cinemax's 138 screens and an average ticket costing Rs.156.
Does this mean that PVR got a raw deal? Not really. For one, the acquisition will make it India's largest cinema-hall operator. Moreover, Cinemax's strong presence in the Mumbai region, where tickets tend to be costlier, should augur well. Also, while PVR's revenues were higher than Cinemax's in the first half of this fiscal, the latter's net profit margin was higher at 11.7%, compared with PVR's 6.6%.
Additionally, PVR may also enjoy economies of scale, negotiating better deals both for film-exhibition rights and with other suppliers, and cut shared costs. Cinemax has a strong presence in western India while PVR is strongest in the north. The acquisition gives PVR a better spread. The company will raise Rs.260 crore through a preferential allotment to part fund the acquisition.
This acquisition comes at a time when good content is lined up and movie exhibitors are being rated upwards. Little wonder then shareholders of both the stocks cheered the deal. For now, PVR investors seem to be looking at the glass as being half full.
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