PVR Ltd has struck a good deal with DLF Ltd to acquire its multiplex business. DLF will sell the multiplex business of DT Cinemas (a wholly owned subsidiary of DLF) on a slump sale basis to PVR, for a consideration of Rs20 crore in cash and the rest in equity, by issuing 2,557,000 shares. At the current market price, the shares would be valued at Rs36 crore. The total consideration will be about Rs56 crore, but could vary depending on the assumed share price.
PVR operates 108 screens through 26 cinemas and has a capacity of 27,827 seats. DT Cinemas has 26 screens, with three more set to get operational in the next six months, with a current capacity of about 5,300 seats. Thus, the acquisition adds about 24% to the number of screens owned by PVR and 19% to the number of seats. Revenue of DT Cinemas’ multiplex business has not been disclosed. However, PVR’s market capitalization is about Rs320 crore and if we take the number of seats as a metric, then 19% works out to Rs61 crore. The valuation appears to be reasonable.
Why did DLF sell the business? DLF’s motive for starting this business was to have it as an anchor tenant in the malls it has set up. That helped draw people to the mall and act as a selling point for other retailers to buy or lease space. Initially, having a multiplex business in-house may have helped, but it’s a business that has very different dynamics. It is also capital- intensive in the initial years.
And, the slowdown that hit real estate has led to DLF deciding to discard its non-core businesses.
But a multiplex is an integral part of a retail mall, which explains the transaction structure, which ensures a degree of inter-dependence.
DLF gets a stake of about 9% in PVR, which can be sold at a higher valuation, later. DLF will continue to get lease rentals from these cinemas and even a share of revenue. PVR benefits from scaling up at a relatively low cost. It also gets a running business and the right to set up multiplexes in all new DLF malls. Size gives more bargaining power in this business and also spreads out costs such as marketing and promotion over a large number of screens. PVR’s profitability can improve as a result.