How PVR Stands To Gain From SPI Cinemas’ Acquisition

PVR Ltd.’s acquisition of SPI Cinemas Pvt. Ltd., the owner of the iconic Sathyam Cinema in Chennai, is expected to help India’s largest multiplex chain strengthen its foothold in southern India.

PVR will pay Rs 633 crore to acquire 71.7 percent stake in SPI Cinemas, according to an exchange filing. For the rest, it will issue fresh shares to SPI Cinemas shareholders that will be equivalent to 3.3 percent in the diluted equity of PVR.

SPI Cinemas has existing debt of Rs 160 crore. Based on Friday’s closing price of PVR, the enterprise value of SPI Cinemas works out to about Rs 1,000 crore, according to BloombergQuint’s calculations.

The deal is expected to be closed in the next 30 days and the merger will be completed over nine to 12 months.

What Will The Acquisition Do For PVR?

• The acquisition of SPI, the largest cinema exhibitor in south India, will make PVR the seventh-largest multiplex chain in the world, according to a company presentation.
• On completion of the acquisition, PVR’s total screen count will increase to 706 across 152 properties and 60 cities. PVR had acquired Cinemax in 2013, followed by the acquisition of DT Cinemas in 2016.
• SPI Cinemas has a network of 76 screens across 17 properties and 10 cities across Tamil Nadu, Telangana, Karnataka, Kerala, Mumbai and Andhra Pradesh. SPI has a pipeline of more than 100 screens, which are expected to become operational over the next five years.
• Post acquisition, box office revenue from regional films for PVR will increase from 19 percent to 22 percent.

Financials

For financial year ended March 2018, SPI generated a revenue of Rs 310 crore. For the corresponding period, revenue of PVR stood at Rs 2,365 crore.

The average occupancy rate for SPI is 58 percent, much higher than PVR’s 31.3 percent. The acquisition will also increase south India’s share in PVR’s overall screen portfolio from 26 percent to 35 percent, with maximum number of screen additions in Tamil Nadu. At present, PVR has 47 screens across the state, which will go up to 89 post the acquisition.

“For us, expansion of southern India was one of the key objective and this acquisition will further strengthen in that markets as we roll out to Tier-2 and Tier-3 in south India, Nitin Sood, chief financial officer at PVR,” told BloombergQuint. The company expects almost 35 percent of its screen portfolio to be from the southern states by the end of this financial year, he added.

PVR already had a debt of almost Rs 600 crore, and is currently at debt equity of 0.5x which will go up post this acquisition.

Brokerage Take

Dolat Capital

• Acquisition of Satyam remains positive for PVR in the long term despite high valautions.
• Scalability for Satyam may be tougher for PVR as compared to DT cinemas as South has challenges in average ticket prices cap.
• Realisation in southern markets not as high as western and northern in terms of ad spends.
• South India demands a higher distributor share for regional content due to their higher dependency on single screens for collection.

CLSA

• PVR to be the no.1 operator in the top three cities of South India (Chennai, Bangalore and Hyderabad) post acquisition
• Higher occupancy levels partially justify the premium valuation.