High ticket prices may give the impression of the multiplex business being very profitable but a gathering trend of consolidation seems to suggest otherwise.
Inox Leisure Ltd has acquired a 43.3% stake in Fame India Ltd for Rs66 crore and will also make a mandatory open offer to acquire 20% more. Recently, PVR Ltd agreed to buy out the multiplex business of the DLF group.
The price paid by Inox translates to an equity value of Rs153 crore for Fame. The market cap to sales ratio for the acquisition is 1:1, which seems attractive considering Inox itself trades at a ratio of two times. But the lower value is due to better financials of Inox and high debt on Fame’s books, at Rs128 crore compared to just Rs45 crore for Inox.
Inox and Fame are almost equal in terms of their physical infrastructure, with 31,401 and 26,490 seats respectively. But Inox’s operations are more concentrated in the north and east while Fame’s theatres are most concentrated in the west. The acquisition gives Inox a national footprint.
In the multiplex business, the main costs are payments to distributors, rentals paid to developers, employee costs, food and beverage expenses and depreciation. In most operational costs, Inox seems to have a lower cost to income ratio, which it will seek to replicate at Fame, apart from using scale benefits to bring down costs. Eventually, a merger is likely, which is positive but for an increase in debt, after adding Fame’s loans and the debt raised for funding this acquisition.
Inox and Fame share prices were up by 10% and 5% respectively, with both expected to benefit from this transaction.
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