*IDBI Capital - PVR (PVR) has announced acquisition of SPI Cinemas for EV of Rs10bn.*

*What is the structure of the deal?*
• PVR to acquire 71.7% stake in SPI Cinemas for Rs6.33bn for cash (included earn-out based payment of Rs1bn)
• Balance 28.3% stake to be acquired by issuance of 1.6mn shares of PVR which is Rs2.1bn at CMP
• PVR to take over Rs1.6bn of debt
• PVR expects the acquisition to be EPS accretive from year 1
• PVR expects the acquisition to be complete in 1 month and merger to be completed in 9-12 months

*How does PVR plan to fund the acquisition?*
• Rs9bn = Rs3.85bn from internal accruals, Rs1.5bn through debt and Rs2.1bn through issuance of shares
• Rs1bn as deferred payment

*About SPI Cinemas?*
• SPI Cinemas is a leading cinema chain in the Southern market
• It has 68 screens already operational and is expected to add another 8 screens in the next 3 months. Another 13 screens lined up over the next 1 year
        o It has pipeline of another 100+ screens over the next 5 years
• *FY18 metrics: Footfall of 12.3mn, Occupancy of 58%, Gross ATP of Rs141, Gross SPH of Rs83 (59% of ATP)*
• *FY18 Financials: Revenue of Rs3.1bn, EBITDA of Rs633mn and EBITDA margin of 20.4%*

*What is in it for PVR?*
• Strengthens PVR’s presence in the Southern market. PVR would become the No.1 player in Chennai, Bangalore and Hyderabad
• Screen count would cross 700 mark and add to PVR’s 1,000+ screens target
• *SPI Cinemas has the highest occupancy of 58% in India, Gross SPH/ATP of 59% and EBITDA margin of 20%+, all higher than that for PVR*
• Diversification – Box office revenue from regional content would increase to 22% from 19%
• PVR expect SPI Cinema’s EBITDA to increase to Rs900mn to Rs1bn in FY20

*What does the deal valuation work out to be?*
• EV/Screen of Rs147 mn (for 68 screens) and Rs132 mn (if 76 screens are considered)
• EV/EBITDA of 14.5x FY18 and 10x-11x FY20 at PVR’s expectation of Rs900mn-1bn EBITDA
• *Drivers for growth in EBITDA:*
        o Footfall to improve in FY19 post impact of strikes in FY18
        o Full benefit of increase in ATP cap in Tamil Nadu in FY19
        o 23 screens expected to be added in FY19
        o Synergies with PVR especially on advertisement revenue and F&B front

*Comments:* While PVR has paid premium valuation, the EV/screen is similar to what PVR had paid for its acquisition of DT Cinemas. The acquisition clearly strengthens PVR’s position in the Southern market. Also, the operating metrics and EBITDA margin for SPI Cinemas is better than that of PVR.

The recent deal with Bookmyshow and PayTM with Rs3.5bn upfront payment would support the internal accruals part of the funding. *Our first-cut analysis suggests that the PVR’s FY18 EPS increases by ~2.3%. We await more details on PVR’s expectation to SPI Cinema’s EBITDA increasing to Rs900mn to Rs1bn in FY20