Patience pays big time to BT Group

Yesterday, the BT Group sold its remaining 9.1% stake in Tech Mahindra Limited for a little over Rs. 1000 crores, marking its complete exit from the technology major. With this, the British company ended its two decade association with its Indian joint venture partner Mahindra and Mahindra.

The newspapers came flushed with comments that the shareholding of BT Group was an overhang on Tech Mahindra’s stock, and the exit was a positive development. I don’t know how correct that is since I was more interested in finding out how much IRR did the BT Group make through its investment in Tech Mahindra? An IRR of 29%, excluding the dividend income, indicate my calculations.

The BT Group sold its 43% stake in four tranches – 10.5% stake at the time of IPO in August 2006, 6.9% in November 2010, 14.1% in August 2012 and the remaining 9.1% in December 2012 – earning a handsome Rs. 3,150 crores on its Rs. 14 crore investment done in March 1990. (Write to me to get the excel sheet showing calculations for IRR).

Someone rightly said... patience pays big time!

PVR Bijlis pay Rs. 5 crore per screen to buy out Cinemax Kanakia’s

Last week PVR announced the acquisition of Cinemax India. As per the company release, PVR would buy the 69.3% stake of Kanakia family in Cinemax India for Rs. 394 crores. It would also make the mandatory open offer to buy an additional 26% stake in the company for Rs. 148 crores.

PVR has been eyeing an acquisition for a very long time and Cinemax suited it perfectly. PVR was strong, particularly in North India, while Cinemax held a good stand in Western India, including the premium Mumbai market. The promoters of Cinemax are basically real estate developers with a good name in the Mumbai suburbs and the cinema exhibition business was sort of an offshoot for them, though it earned good money in the cinema exhibition business compared to its peers.

PVR had previously sewn a deal to acquire the cinema exhibition business of real estate giant DLF, however the deal could not go through for unknown reasons. PVR, which is targeting 500 screens by 2015, urgently needed that real big push which only an acquisition could provide. In Cinemax, PVR got 138 screens, which would take the total screens count for the company to 351, making it the single largest cinema chain in India.

PVR needed Cinemax more than Cinemax needed PVR.

Coming to valuations, PVR is paying an Enterprise Value (EV) of Rs 682 crores for Cinemax, resulting in an EV per screen of Rs. 4.9 crores. The capital expenditure on one screen in a metro is usually in the range of Rs. 2.0 - 2.5 crores. PVR paid higher as it got good locations and a ready to use facility. However, the premium Kanakia’s received was way too high and a valuation of Rs. 4 crores per screen seems justifiable to me. One may argue that Cinemax earned about 2-3% higher EBITDA margins compared to PVR and this should also be taken into account for the deal premium. Then there is the question of brand value associated with “Cinemax”, though I am not sure whether PVR got to retain the new brand. Anyway, I don’t think PVR needs another brand.

PVR did its homework proper this time as the Bijlis did not want to let this go away or embroil in a legal tussle like the one INOX and BIG Cinemas had for Fame India. PVR needed Rs. 542 crores in total, Rs. 394 crores to buy out the Kanakia family and Rs. 148 crores for the subsequent open offer to general shareholders. The Bijlis raised Rs. 260 crores through preferential allotment and Rs. 280 crores by way of debt. The preferential allotment was subscribed to by the original promoters and two private equities, namely Renuka Ramnath’s Multiples and LVMH’s L Capital. The debt money came from Indostar Capital Finance, L&T Finance and GE Capital.

Markets have given thumbs up to the deal; PVR is up 27% since it announced the acquisition. Investors seem to be happy over the fact that two large private equities have shown faith in PVR.