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Portfolio Move: The Details of the CCI Order on [stock] Acquisition and How It Impacts The Stock

Portfolios

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PVR signed a deal to acquire 39 screens from DT Cinemas (DLF’s multiplex arm) which was under consideration by the Competition Commission of India (CCI). CCI has finally given its order and nod to the acquisition subject to some important changes. We highlight them in this post.

The CCI Order has some details, much of which haven’t been described in the press. Not all of them are favourable to PVR but they are useful to know and understand.

PVR

The proposed acquisition of DT Cinemas by PVR encompasses four major markets – Gurgaon, Noida, Chandigarh and Delhi. The Competition Commission need to approve to ensure there wasn’t a monopoly and they take in consideration a number of factors – what’s the current marketshare, how much more will change in the next two years and some other factors.

The CCI found that marketshares in Chandigarh will go up from 36% to 41% which is not significant, and that Cinepolis has significant competition at 30%.

In North, West and East Delhi the additional screen count will only be 4, and marketshare increase is only 5% which again is not a big deal.

In Noida, however, there’s a problem – the marketshare will increase to 53% from 43% and that’s significant. So PVR has agreed to give up 15 screens in an upcoming mall called Garden Galleria. Also PVR agreed that it will not expand into NOIDA, organically or inorganically, for three more years.

In Gurgaon, marketshare would increase from 37% to 50%, again a big deal. So PVR has agreed to give up 7 screens in Aaria mall in Gurgaon. And it will not get new screens into Gurgaon for three years.

South Delhi has a big problem as well, and they will have to:

• Cap Ticket Prices at current levels for three years (5% increase in 4th and 5th year)

• Cap Food and Beverage prices at current levels for three years (5% increase in 4th and 5th year)

• PVR cannot get any more screens in south Delhi for five years

• Reduce the scope of the non-compete agreement with DT to three years from five

• and reduce the geographical restriction for the non-compete with DT to Delhi-NCR+Chandigarh (from all India)

• Not acquire 7 screens – 6 in Saket and 1 in Savitri in south Delhi. (DT will continue to operate them or sell them to others)

• Also they cannot demand exclusivity from any distributor for a film.

How Do These Changes Impact PVR?

We think that PVR is likely to renegotiate the price down from the Rs. 500 cr. earlier agreed, to a figure lower by Rs. 50-100 cr. due to the changes above.

DT requires the cash flow so it will be amenable to the price change but may not agree to a significant lowering of price. However, what is important to note is that PVR’s expansion in the key areas of Delhi-NCR are stunted for three years. They can neither get more screens of their own (other than the ones they have an agreement with already) or acquire more from competitors. Delhi is a solid market, but for PVR the growth should come from elsewhere.

We think elsewhere is where the market is. They have opened more screens in Lucknow and now have 519 screens in 46 cities. PVR is getting smarter and stronger in Tier 2 and Tier 3 towns, and that’s where some of the urban spending on movies is growing the most.

The DT deal would have given them 39 screens for Rs. 500 cr. Now they will get only 32 screens and lose the very lucrative Saket screens (PVR already has screens in an adjacent mall in Saket). So we expect that renegotiations will take the deal size closer to 400 cr. but give PVR about 6% increase in screen count.

The deal continues to be expensive but in the longer term, seals PVRs chances of being the dominant player in the multiplex business. While earnings are still a few days away, we think the stock will react positively as the impact of the growth sets in over the next two years. We continue to be long the stock in the Long Term portfolio and look forward to results. We hope this update gives  you a better idea of the CCI impact on PVR.

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Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.

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