Event update: PVR (Neutral) - North and West conquered, now King of South as well!

Event

PVR Ltd. (PVRL) has approved the acquisition of 71.69% stake in SPI Cinemas Pvt. Ltd. (SPI) for ~Rs6.33bn in cash. The transaction is expected to conclude by September 2018, and the balance 28.31% stake would be acquired by H2FY20E (through issue of 1.6m new equity shares of PVRL – 3.3% dilution of existing equity capital). The deal is subject to NCLT/SEBI/Shareholder approvals.

SPI Overview

SPI is a key movie exhibitor in Southern India with 76 operational screens (68 operational screens as on date and 8 screens to be opened within 2-3 weeks) across 17 properties in 10 cities (cinema brands include Sathyam, Escape, Palazzo, The Cinema, S2 Cinema). This includes Chennai where it is the #1 player (31 screens). SPI expects to open 13 additional screens over the next 12 months. The company posted rev. of ~Rs3.1bn in FY18 (13% CAGR over FY16-18) with a 20.4% EBITDA margin.

Funding Plan

PVRL’s 71.69% stake purchase in cash would be financed through ~Rs3.85bn of internal accruals and ~Rs1.5bn through new debt issuance. The balance ~Rs1bn would be deferred (payable on achievement of certain milestones). The deal would value the company at ~15.7x FY18 EV/EBITDA. (EV ~Rs10bn – including ~Rs1.6bn of existing SPI debt).

Outlook

We believe that this acquisition is a very strategic fit as it catapults PVRL to the numero uno position in the Southern market (after already achieving the same in Northern and Western India). While the acquisition multiple appears marginally stretched (at ~16x FY18 EV/EBITDA, almost in line with PVRL’s FY18 multiple), adjusting for one-off events like the TN cinema strike and the fact that FY18 EBITDA is for 53 screens only out of which 17 were opened in FY18 and would be at a sub-optimal level initially; as a result the acquisition multiple is more around ~12x, which is a good deal in our opinion. Many synergies abound such as increasing ad revenue at SPI led by network effect, F&B cost synergies and some savings in film hire cost given increasing scale (esp. Hollywood). While we remain confident of PVRL’s execution capabilities, our Neutral rating on the stock is driven by the on-going F&B regulation overhang on the industry as a whole.