Merger Analysis

MERGER ANALYSIS  Strategic premium paid by PVR: The valuation of Rs6.6bn implies an EV/screen of Rs48m

As seen from the above table, the EV/screen for PVR at the time of merger was Rs 48mn per screen .The valuation of Rs 6.6 bn implies an EV/ screen of Rs 48mn for Cinemax. This implies an almost 17% premium to the current EV/screen for PVR. Considering all “strategic” transactions include a premium of 15-25%, the value being paid by PVR is in line with acquisition deals. The Kanakia Group, promoters of Cinemax, seem to have got a fair exit from the business.  Operating Synergies: Though the deal might seem expensive from the point of view of PVR, it would help PVR become the No 1 multiplex operator in India. The screen count is expected to go upto 500 in the next two years. Its revenues would exceed $200mn and it would control 30% of the box office collections. Cinemax would add a steady state annual EBITDA of about Rs900m1bn to PVR from Year 1. The deal provides synergies in terms of higher ticket prices and better negotiation powers with producer/distributor. In the anticipation of the deal the prices of PVR stock have been continuously on the rise:

Source: IDFC Securities Research

 Stronger share in Box office collections: PVR currently controls 14% of Bollywood box office collections, while Cinemax controls 11%.The combined entity will have a commendable 25-30% control on all India Bollywood box office collections  Evolving trends and the timing of the deal: The transaction points out the bold step taken by PVR in implementing such a big transaction (a valuation of Rs 6.6 bn for Cinemax). This also represents the evolving trend in the multiplex industry. The timing of the transaction was also good considering the potential of the movies in the pipeline at that time.  Competitive advantages for the combined entity: It has provided competitive advantages to PVR. PVR is able to become the largest multiplex chain in the country with 351 screens currently. Next is INOX Fame with a total screen count of 257 screens. This will also act as a barrier to the entry of any other big multiplex chain in India  Geographical Synergies: PVR is currently concentrated in North India (50% screens) while Cinemax in West India (64% screens). The combined entity will have a diversified regional presence with 34% in North and 46% in West. This will provide cross leverage benefits to the combined entity.  Strong performance by Cinemax: Cinemax had poster improved performance in the last few quarters before the deal. It’s ATP (Average ticket price) and F&B spends have constantly improved. In H1FY13, Cinemax garnered revenues of Rs2.2bn, EBITDA of Rs477m and a PAT of Rs251m. Cinemax showing an improvement in key operating parameters

Source: IDFC Securities Research  Acquisition Funding: Pre-merger PVR’s net debt was almost Rs 1.5bn and D/E stood at 0.6x. To fund this deal, it needs to raise INR1.35bn additional debt (D/E is likely to remain at ~0.7x). PVR is raining the remaining Rs 2.6 bn by way of preferential allotment.