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INOX Leisure Ltd (updated - 05 Feb 2010)
With Inox Leisure buying 43 per cent stake in Fame India, it seems to be a win-win deal for both companies. The all-cash deal, whereby Inox’s promoter, Gujarat Fluorochemicals, will shell out Rs 66 crore for the stake, it will add 95 screens to Inox’s kitty, taking the total number of screens for the two entities to 204 and the total seating capacity to 57,891.

This will not only catapult the combined entity ahead of the current No 2, PVR Ltd, but more importantly, it will strengthen Inox’s presence in the western India. For instance, while Fame has 32 screens in Mumbai, Inox has just six.

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The acquisition will also bring into Inox’s fold Fame India’s subsidiaries - Shringar Films (film distribution), Headstrong Films (film production joint venture) and Big Picture Hospitality Services (food business joint venture).

While Inox is likely to make an open offer for a further 20 per cent stake (according to the Securities and Exchange Board of India’s guidelines), if the acquisition price is taken as base, the deal costs Inox about Rs 2.28 crore per screen, which is at apremium to the Rs 1.93 crore PVR paid for the DLFowned DT Cinemas. The premium is justified considering the synergies and the near doubling of Inox’s exhibition business assets.

Going ahead, Inox also plans to add about 40 screens in the next financial year. Considering that setting up a screen costs about Rs 2-2.5 crore, this will entail an investment of about Rs 100 crore. While Inox is expected to generate about Rs 30 crore in cash profits during the current financial year, it will have to rely on debt to bridge the shortfall.

Further, it will also have to contend with Fame India’s debt pegged at Rs 140 crore, 60 per cent of which is foreign currency convertible bonds (FCCBs) debt due next year.

However, if it manages to improve the operating profit margins of Fame India to around 20 per cent (currently at 12 per cent), it will be able to generate more cash.

The markets welcomed the acquisition, pushing up the stock prices of Fame India and Inox by 4.8 per cent and 9 per cent, respectively, at close on Wednesday. While Fame India stayed at the upper circuit for the second consecutive day after the deal was announced, Inox ended 13 per cent lower on Thursday on reports that there might be a rival bid for Fame India.

Analysts suggest that the future of the multiplex business, especially for operators with an all-India network, appears bright. From a share of 15 per cent in 2006-07, multiplex chains now accounts for about half of the box office collections.

While the first quarter of the current financial year was adisaster due to the standoff between producers and exhibitors, analysts believe multiplex owners can expect better growth in the calendar year 2010, as against the 11.5 per cent (year-on-year) posted in 2009, on the back of major releases lined up for the year.
At Rs 77, Inox trades at 19 times FY11 earnings.
source - BS