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MACR Group 3 - Deal Proposal - Final - v12 PDF
MACR Group 3 - Deal Proposal - Final - v12 PDF
MOHAMMED MUSTHAFA
SANJEEV DAS
SALEEM
Deal Proposal:
Acquisition of PVR Cinemas by Zee Limited
Industry, Acquirer & Target Analysis
Industry Analysis: Media & Entertainment
1 1%
4%
8% Domestic Theatrical • GOI increases FDI from 74% to 100% for M& E Sector.
60% Strong demographics, rising disposable incomes and
1
85%
174% 70% Single Screens 11% Overseas Theatrical
discretionary spends
Multiplex Broadcast Rights
screens • Increasing share of Hollywood and 3D Digital Cinema
Digital/OTT rights
26% 30%
40% 59% In-cinema advertising
• High flexibility due to different screen sizes that leads to
15% higher occupancy ratios
17%
Home Video
F Y15 F Y18 F Y19 F Y23P
• Growth of Multiplexes: state of the art equipment(high
Multiplexes currently account for ~31% market share of screens, however they account for ~55% of box office collections quality audio & video),superior interiors, ambience and
Producers are being offered profitable deals by OTT firms at sizeable premium that varies from 80% for small /mid sized firms to customised services
as high as 120% for large sized firms.
Higher mix of single screens with low ticket prices drives the ATP (Average ticket price) in India low compared to Global average • Release of star studded films during the festive season
(average ticket size is <1 USD) towards later end of the year when consumer behaviour
Future trends include: Partnerships with OTT platforms, Multipurpose venue usage and market consolidation moves toward normalcy
Executive
Industry, Acquirer Summary
& Target Analysis Plan
Business Valuation
Target Selection and Deal Rationale Preliminary Deal Analysis Deal structureDeal Structuring and Details
Acc/Dil Analysis Appendix
Synergy
Summary
Target Company Profile : Zee Limited
Zee Limited Business Overview Cost & Revenue Drivers Strong Global Presence
Executive
Industry, Acquirer Summary
& Target Analysis Plan
Business Valuation
Target Selection and Deal Rationale Preliminary Deal Analysis Deal structureDeal Structuring and Details
Acc/Dil Analysis Appendix
Synergy
Summary
Target Company Option 1 : PVR Cinemas
Business Overview Cost & Revenue Drivers Geographical Presence
PVR Limited is the Largest Multiplex Film Exhibitor of India Shifting expansion focus to
Footfalls Tier II, Tier III cities to
Footfalls
Revenue capture untapped potential
Admits
32,844 OVERALL 102 By 2030, India’s middle class is
ATP,
Million INR Million expected to reach 80% from ATP, SPH
SPH
845
existing 50% to drive spending
Executive
Industry, Acquirer Summary
& Target Analysis Plan
Business Valuation
Target Selection and Deal Rationale Preliminary Deal Analysis Deal structureDeal Structuring and Details
Acc/Dil Analysis Appendix
Synergy
Summary
Target Company Option 2 : INOX Leisure Limited
Business Overview Cost & Revenue Drivers Geographical Presence
INOX Ltd is the Second Largest Multiplex Film Exhibitor of India Rising trend of successful
Occupancy
Occupancy regional and small budget
Revenue Admits movies to drive occupancy
Net Profit
626 EBITDA
Non
consumer spending
Listed on Acquired
Employee Benefits Expens es
Opened First
Other Operating expenses
S
8% •
C
• Financially better positioned Securing strategic locations on
compared to its peers commercially viable terms
52% • Robust screen expansion outlook • Regulatory changes & Controlled
20% ticket prices in some states
of 1000+ screens post FY20
10%
• Young demographics of India ideal
• Competition from alternative content
for consumption of films
and distribution channels (OTT)
Promoters
MutualFunds
Foreign Institutions
Others
O • Room to improve Operating metrics
by focus on Premium formats
• Piracy and live-streaming videos
may reduce cinema customers T
• Wide variety of regional as well as
• Increasing competition in the
General Public Financial Institutions international content to drive growth
industry
Executive
Industry, Acquirer Summary
& Target Analysis Plan
Business Valuation
Target Selection and Deal Rationale Preliminary Deal Analysis Deal structureDeal Structuring and Details
Acc/Dil Analysis Appendix
Synergy
Summary
PVR Cinema vs INOX: Comparison of Business Fundamentals
PVR Ltd. has an announced strategy of diversification and inorganic growth while Inox prefers organic and focused approach; qualitative
aspects strengthens the position of PVR due to having better geographical mix and industry-specific management experience`
The ticketing and F&B revenue contributed to ~80% revenue in The ticketing and F&B revenue contributed to ~84% revenue in
FY20. Over the past few years, split has remained almost the same FY20. Over the past few years, split has remained almost the same
Revenue
58% 26% 9% 3%4%
Streams 52% 28% 11% 5%3%
Ticketing F&B Ad Income Convinience Fee Others Ticketing F&B Ad Income Convinience Fee Others
254 47 149 87
Screens North East North East
Distribution 286 258 138 252
South West
South West
CAGR CAGR
In INR Bn FY19 FY20 FY21 FY22 FY23 In INR Bn FY19 FY20 FY21 FY22 FY23 (20-23)
(20-23)
Revenues 30,855 34,144 13,248 31,762 38,205 5.5% Revenues 16,922 18,974 7,558 19,396 26,302 11.7%
Financial EBIDTA 5,422 10,388 1,770 7,775 8,644 12.4% EBIDTA 3,092 5,968 1,800 4,043 5,742 16.7%
Projections EPS (INR) 40.6 5.3 -105.3 10.3 48.5 4.5% EPS (INR) 13.5 1.4 -24 6.1 17.3 6.4%
ROCE (%) 19.4 14.6 -3.1 8.9 12.5 ROCE (%) 19% 15% -3% 9% 13%
Executive
Industry, Acquirer Summary
& Target Analysis Plan
Business Valuation
Target Selection and Deal Rationale Preliminary Deal Analysis Deal structureDeal Structuring and Details
Acc/Dil Analysis Appendix 4
Synergy
Summary
PVR Cinema vs INOX: Comparison of Operational Metrics
PVR Ltd. fares better on all key operating metrics across FY17 to FY21 as compared to Inox
Executive
Industry, Acquirer Summary
& Target Analysis Plan
Business Valuation
Target Selection and Deal Rationale Preliminary Deal Analysis Deal structureDeal Structuring and Details
Acc/Dil Analysis Appendix 4
Synergy
Summary
Target Selection and Deal Rationale
Evaluation Metrics: Rationale for the merger
On Basis of Synergy Evaluation, PVR have better synergy with ZEE as compared to Inox basis ownership, operational synergy
Parameter PVR Cinemas Evaluation Inox Evaluation
• PVR is a professionally managed company and it’s strategy has • INOX is a family owned and managed company and aims to grow
Merger Candidate Selection
been to grow organically and is proven consolidator. organically, and its owners have shown interest in staying invested
Strategic Fit • PVR intends to diversify to reduce dependence on one stream in the theatres business
• PVR is also present into distribution business, which can be a • Inox shows no interest in diversification into other businesses
useful adjacency for Zee
• PVR has increasing presence in the Tier 2 and 3 presence with • Inox has no common line of business with Zee. Further, Inox
Operational PVR Utsav coming in. This will help Zee push its regional content presence in mid premium segment is low
Fit and thereby also increase occupancy for PVR. distribution. Re- • Further, managing merger with promoter style line of business may
branding may pose a challenge. Distribution prove to be difficult
• PVR being a professionally managed firm, with investments from • INOX being a promoter driven business, closely knit to the family
Takeover fit Private Equity amongst other would be more willing to be taken fabric is unlikely and difficult target for take-over
over for an accretive deal • Family run businesses can pose difficulty in PMI
• PVR has a market cap of 80,625 mn and a net debt of ~INR 8,700 • INOX has a market cap of 29,035 mn and net debt of ~INR 1,119
Financial Fit Mn Mn
• Also, PVR commands a higher EV/EBITDA of ~7x • Also, INOX commands a higher EV/EBITDA of ~4.9x
Though PVR is a larger target to acquire, it fits better within the Though INOX can help Zee in entering the Movie exhibition
Final Zee ecosystem. If funding and approvals are secured. PVR can business, Zee will have to invest significantly to scale Inox. Also,
Selection be an attractive target to acquire family run business may pose an integration challenge
Since Zee targets to have vertical expertise in the Media and Entertainment Strengthened by its acquisitions of SPI cinemas and DT cinemas, PVR
segment and also aims to provide platform agnostic solutions, acquiring PVR most has built a balanced geographical spread which shall protect the
importantly enables Zee to venture into the theatre platform and also earn higher merged entity from any geography-specific market risks.
advertising revenues given the market leadership of PVR.
Zee5 can leverage PVR’s distribution network and avoid dependence on external distributors
Movie INR 570 to 12-20 GBOC GBOC
Distribution 1-3 Large Margins
1,050 Mn p.a Budget Upto 200
Films
Upto 1000
films Mn 10%-15%
Mn
Zee has a repository of content - it can leverage and display on the movie during off peak times
Improved INR 131 to 460
Occupancy Footfall (FF) of Incremental FF ATP of PVR SPH of PVR
Mn p.a
respective year 1% - 2% (discounted) (discounted)
PVR can cross-sell Zee5 subscriptions along with its movie tickets (Bundling)
Improved INR 143 to 366 No. of times
Subscriptions FF each Avg. size Conversion Subscripti
Mn p.a person watches
year of Group Rate on Price
movies in a yr.
INR 639 Mn to Zee and PVR will benefit from savings in redundant and common cost. Further, Zee can negotiate
Cost savings better terms with content producers for both OTT and theatrical rights
704 Mn p.a Employee costs savings are assumed to be 1% of PVR’s existing cost
There are multiple other synergies, which are qualitative in nature and cannot be quantified such as
Total value of
INR23,289 Mn information sharing and strategic expertise. Further, when compared with greenfield investment,
Synergies or INR 423 per acquisition of PVR seems to be a much better deal
share Synergies are valued using WACC of 12.3% and perpetual growth rate of 3%.
Valuation of PVR
WACC
7.4x – 16.4x 469 1,243
of EBIDTA metric
EV/EBITDA The EV/EBITDA arrived at based on trading comps of 12.30% 1,610 1,638 1,668 1,702 1,740
Trading 6 peers. Max taken to account for PVR’s Leadership 13.30% 1,510 1,532 1,557 1,584 1,613
Comparable Avg. Revenue of FY22E taken to arrive at normalized 14.30% 1,422 1,440 1,460 1,482 1,505
EV / Revenue 1.5x – 2.7x 456 917 value of Revenue metric
The EV/EBITDA arrived at based on trading comps of
6 peers. Max taken to account for PVR’s Leadership Exit Multiple
8.3x 9.3x 10.3x 11.3x 12.3x
Avg. EBITDA of FY22E taken to arrive at normalized
Transaction
EV/EBITDA 5.4x – 7.9x 850 1,317 value of EBIDTA metric 10.30% 1,861 1,966 2,071 2,176 2,281
Comparable The EV/EBITDA arrived at based on 8 transactions. 11.30% 1,700 1,802 1,903 2,005 2,106
WACC
A premium of 0-20% premium over the existing VWAP 12.30% 1,569 1,667 1,765 1,863 1,960
Premium
over Market Offer Premium 0.0% - 20.0% 1,328 1,593 share price of INR 1,328 13.30% 1,458 1,552 1,647 1,741 1,836
In line with average premiums paid over 2 week VWAP
Price 14.30% 1,362 1,453 1,545 1,636 1,727
PVR Revenue & EBITDA Margin Valuation Assumption
Actual Estimated Screen addition to ~1,100 screens by 2025 as per management plans
Footfalls assumed to decline by ~65% per screen in FY21 due to impact of Covid-19. Post 2021, the total
Exhibition footfalls assumed to reach normalcy and grow faster due to better occupancy
F&B revenue
The footfalls increase are supported by better content availability, a benign base, release of halted production
Advertisement
31% files, increase in number of screens. ATP declined by 10% in FY21 (in order to attract footfalls). Overall ATP
Other Operating FY20-25E CAGR taken at 3%. Occupancy level assumed to decline to 14% upto FY22 with comping back to its
31% existing level (36%) by FY25.
30% Spend Per Head reduced by 8% in FY21 and assumed to bounce back to normal in FY22 given increasing shift
28% 30%
28% towards healthy options and hygiene considerations. Lack of big-ticket releases, lower ad budgets hampered ad
27% revenue in FY21. We project a rebound in FY22, economic slowdown to have more pronounced on ad spends
27%
27% which coupled with screen additions will keep ad revenue/screen in FY25 below FY20 levels. Overall the ad
28%
54% 53% 53% 53% 51% 53% 53% 53% 53% revenues will rise at 5% CAGR between FY20-25
50%
Further, we assumed that EBITDA margins achieved in FY20 will be achieved from FY22 onwards Terminal
Value is taken as an average of perpetual growth method and exit
4
Industry, Acquirer & Target Analysis Target Selection and Deal Rationale Preliminary Deal Analysis Deal Structuring and Details Appendix
Structuring The Deal
Transaction supported by 75% debt for accretiveness with limited dilution and low interest cost due to low debt in books of Zee
Proposed transaction summary and allocation Proposed transaction summary and allocation
(INR mn) 75% Refinance
A: 85% Equity + B: 70% Equity + C: 50% Equity + D: 25% Equity+ E: 10% Equity+
PVR Debt
15% Debt 30% Debt 50% Debt 75% Debt 90% Debt
by new debt
Composition: Composition: Composition: Composition: Composition:
9,712 90,430 ( 67,820)
• 85% equity • 70% equity • 50% equity • 25% equity • 10% equity
80,718 Debt • 15% debt • 30% debt • 50% debt • 75% debt • 90% debt
Description
y
rights and production iss
Zee Entertainments share have dropped by ~75% within a ua
span of 1-1.5 years, due to various shocks faced including nc
promoters shares pledge, director resignation, TRAI e
Equity
regulations, sluggish advertisement revenue due to existing
macro environment challenges and COVID impact
The prices seems to be at a steep discount, using equity will
lead to diluting the stake at a very cheap valuation •
Low cost of debt • High • Reduced • Lesser dilution • Low cost of
for issuances dilutive equity position of stake due to debt means 4
Target Selection and Deal Rationale Preliminary Deal Deal Structuring and Detailsselling equity at Appendix
Industry, Acquirer & Target Analysis • Less risk Analysis
of effect due still ties in fate cheaper
Accretion / dilution analysis
Deal becomes accretive from FY24 due to debt repayments and synergy realization
At 75% Debt, Deal Becomes Accretive Post FY24 Assumptions and Considerations
FY22 FY23 FY24 FY25 EV Purchase Value :
Zee PAT 15,464 18,088 20,983 24,340 INR 90,430 mn [Equity Value: INR 80,718 mn (20% Premium over Market Price) + Debt Refinance (Rs. 9,712 mn]
PVR EBIT 2,621 3,003 6,961 9,662 Debt Consideration and Interest Rate Calculation:
Interest on Debt of taken over FY21 FY22 FY23 FY24 FY25 Remarks
6,782 5,087 4,728 4,184
NET FCFF 15,917 17,219 19,323 24,630 ZEE FCFF( E ) + PVR FCFF ( E )
PVR EBT -4,162 -2,084 2,234 5,479 Existing Debt of Zee 5,950 3,000 - - - Preference Shares Due
PAT Before Synergy -2,996 -1,501 1,608 3,945 Debt – PVR Related 67,823 67,823 63,035 55,785 42,684 Debt repayment
Synergies post tax 1,148 1,512 1,874 2,336 Total Debt 73,773 70,823 63,035 55,785 42,684
Balance of FCFF Post Interest
Total PAT 13,615 18,099 24,464 30,620 PVR Repayment - 4,787 7,250 13,101
Payment & Cash Balance
Total Shares Post Merger 1,093.75 1,093.75 1,093.75 1,093.75 Gross EV/EBITDA
EPS of standalone entity 16.10 18.83 21.84 25.33 FY20 FY22 FY23 FY24 Remarks
Merged Entity EBITDA 24,106 30,966.13 35,814.68 39,927.93
Considering COVID impact on
EPS of merged entity 12.45 16.55 22.37 28.00 Gross Debt / EBITDA 3.06 0.44 0.57 0.72
FY21 EBITDA, we have used
Applicable Interest 10.00% 7.50% 7.50% 7.50% FY20 EBITDA for calculation
Accretion / (Dilution) -3.65 -2.28 0.53 2.66
rate
The primary driver for EPS accretion are the synergy, based on our calculation INR 423 present value per share of PVR of synergy can be expected
To make is more accretive we further suggest a deal to provide convertible preference share to PVR shareholders with timelines of the share to be converted at certain percent discount of the trading
share price of ZEE at that point of time. It will assist in raising equity and at the fair price instead of the current highly discounted price of ZEE.
Pre-Merger Post Merger • The shares distribution to take place in way to ensure that the
No. of shares % PVR promoter stake does not exceed the promoter stake of Zee
Particulars
(Mm) Share
Ltd.
Equity Shares to be Issued
• The balance portion of consideration due to promoters will be
To Promoters of PVR Limited 45.8 4.2%
settled in cash received from debt taken for acquisition
To Non-Promoters of PVR
87.2 7.8%
Limited • Further, this arrangement will ensure that recent QIP holders who
Existing Equity Shares were issued shares at INR 1,700+ aren’t forced to exit at valuation
Promoters of Zee Ltd 45.8 4.2% lower than they entered for
Non-Promoters 914.9 83.8% • The swap ratio is also on the assumption that the Zee Ltd. Share
1,093 Mn price is fixed at INR 170, which in our opinion is depressed due to
Total Equity Shares 100%
shares
current situation. In upward revised lower shares of Zee Ltd. will
have to be issued
4
Industry, Acquirer & Target Analysis Target Selection and Deal Rationale Preliminary Deal Analysis Deal Structuring and Details Appendix
Appendix : Trading and Transaction Comps
Trading and Precedent Transactions Rationale
(i) Trading Comps
Cineworld is one of the leading cinema chains in Europe and United states and poses similar
Cineworld 942 2.8x 2.0x 8.0x 5.6x 16.58% 4.81 -78.45%
industry entry barriers like PVR and INOX
Operates in China with similar demographics & relatively lower screen per capita - 36 (India - 7), that
Wanda Cinema 5,791 4.1x 2.5x 27.1x 12.6x -18% 2.31 -20.3%
captures identical growth opportunities
Leading theatre business in South Korea with identical market capitalization ($ 516m) to PVR ($
CJ CGV 516 2.8x 2.0x 14.9x 8.6x 7.8% 6.24 -35.9%
770m) and INOX ($320m)
Operates with Similar screen count, Revenue sources (Box office - 54%, In theatre sales - 27%, etc.)
Kinepolis 1,233 4.3x 3.1x 16.3x 11.3x 18.2% 3.32 -49.1%
and has identical growth strategies
Leading movie multiplex in Canada with relatively Comparable Screen count and market cap, poses
Cineplex 380 2.7x 1.7x 15.4x 7.1x 8.9% 2.92 -78.23%
identical industry entry barriers
Major cineplex is a Leading cinema chain in Thailand, Emerging market identical to India and also has
Major Cineplex 432 2.5x 1.5x 13.1x 6.3x 11.75% 1.63 -54%
Similar screen count and financial size
One of the largest media conglomerates operating in India, to capture risks associated with local Media
Sun TV 2,039 3.8x 3.1x 5.9x 5.1x 34% 0.04 -23%
industry as well as their performance
1.9x 8.5x Belgian Cinema chain buys American(Michigan) based movie theatre chain; 10 theatre complexes & 164
02-09-2019 152.00 Cash Strategic
screens. Perfectly fits into the expansion strategy geographically
12-08-2018 128.00 Cash Strategic n/a 13.9x All cash deal ; Strategic acquisition of South Biggest cinema chain to capitalize on regional cinema &
increase reach
3.3x The acquisition to help China’s largest cinema operator consolidate production, distribution of
26-06-2018 845.00 Cash+Debt Strategic n/a
entertainment division
1.8x 10.3x
28-11-2017 5,869.00 Cash+Debt Strategic Mega Merger of UK & US peer companies to create world’s 2 nd largest cinema group after AMC;
1.8x Target has similar screen count & presence in large and medium cities and the deal helped realize cost
17-01-2017 959.00 Cash Strategic n/a
synergies
9.5x Target has comparable revenues; increases international footprint of Dalian Wanda(Chinese) owned
16-07-2016 1,175.00 Cash Strategic
AMC operator making it the largest movie exhibitor in Europe
11.9x Comparable screen count(~700) and acquisition of Turkey’s largest theatre chain with robust revenue
16-04-2016 800.00 Cash Strategic n/a
collections
1.5x
8.8x Merger establishes dominant presence in lucrative US theatre circuit; significant value to target
01-03-2016 1,114.00 Cash+Debt Strategic
shareholders
8.7x Diversification from television to cinema operations; Demographic synergy both target & acquirer are
21-05-2015 361.00 Cash Strategic n/a Korean based
Valuation
Target Selection
Structureand DealAnalysis
Rationale Ownership
Preliminary
Structure Deal
& KeyAnalysis
Stakeholders Appendix
Executive
Industry, &Summary
Executive
Acquirer Summary
Business
Target AnalysisPlan Funding & EPS Synergy Deal structureDeal
IRR Analysis
Structuring
for Analysis
Acc/Dil PE
andfirm
Details
Summary
Trading and Transaction Comparables
Trading Multiple Valuation
Peer Company Market Cap EV EV/Revenue EV/EBITDA EV/Operating Cashflow P/E Trading Comps Summary
Historicals Forecasts
(in $ m) (in $ m) FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E Multiple EV/Sales EV/EBITDA
Cineworld 942 8,311 2.8x 2.0x 8.0x 5.6x 10.7x 7.0x -8.1x 3.6x Year FY21E FY22E FY21E FY22E
Wanda Cinema 5,791 6,411 4.1x 2.5x 27.1x 12.6x 37.1x 14.4x 180.6x 22.7x Mean 3.29x 2.27x 14.39x 8.09x
CJ CGV 516 3,148 2.8x 2.0x 14.9x 8.6x 61.7x 15.2x -3.4x -105.0x Median 2.80x 2.00x 14.90x 7.10x
Kinepolis 1,233 2,178 4.3x 3.1x 16.3x 11.3x 21.3x n/a 49 16.2x 25th percentile 2.70x 1.70x 8.00x 5.60x
Cineplex 380 1,847 2.7x 1.7x 15.4x 7.1x 24.8x 8.5x -2.7x -103.4x 75th percentile 4.10x 3.10x 16.30x 11.30x
Major Cineplex 432 455 2.5x 1.5x 13.1x 6.3x 29.4x 9.0x -50.6 15.7x
Sun TV 2,039 1,626 3.8x 3.1x 5.9x 5.1x 7.6x 6.8x 11.2x 10.1x Sales EBITDA INOX Sales EBITDA
Selection Criteria: EV(mean) 77,779 48,360 EV(mean) 49,078 34,100
• Industry: Companies with major revenue source from film broadcasting and distribution EV(median) 68,035 43,749 EV(median) 42,930 31,058
• Potential Growth: Geographies with relatively lower Screen per capita to capture growth opportunities
• Financial Size: Proximity to PVR, INOX key fundamentals i.e. financials, number of screens etc EV(25 percentile)
th
59,374 32,381 EV(25 percentile)
th
37,464 22,652
• Weightage of 0.4 to FY21E and 0.6 to FY22E has been given using exponential smoothening method EV(75th percentile) 1,04,297 65,429 EV(75th percentile) 65,812 45,786